AIG Discloses New Risk on Derivatives Sold to Banks

2009 June 30

June 30 2009 - American International Group Inc., the insurer bailed out by the U.S., said that valuation declines on credit-default swaps sold to European banks could have a “material adverse effect” on the company’s results.

The risk of losses on the derivatives may last “longer than anticipated,” the New York-based insurer said late yesterday in a regulatory filing updating the “risk factors” in its 2008 annual report. The firm had $192.6 billion in swaps allowing lenders to reduce the funds they had to hold in reserve as of March 31, AIG said.

“They’re guaranteeing close to $200 billion in assets in probably the riskiest environment in our lifetimes,” said David Havens, managing director at investment bank Hexagon Securities LLC. “It’s a huge number — if there was any surprise, it’s that this hasn’t been flagged before.”

Gerry Pasciucco, hired from Morgan Stanley in November to clean up AIG’s Financial Products operation, is under pressure to unwind contracts at the unit, which brought the insurer to the brink of bankruptcy with separate bets tied to subprime home loans. Collateral payments tied to mortgage-linked swaps drained AIG’s cash last year, forcing the firm to seek a U.S. rescue.

“Given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG’s consolidated results,” the company said yesterday about the European contracts.

AIG Discloses New Risk on Derivatives Sold to Banks

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