AIG tries to quarantine another $10 billion in credit default swaps
IHTBy Mary Williams Walsh
December 10, 2008
NEW YORK: American International Group has said that the $150 billion U.S. government assistance package it received last month is incomplete, and that it still needs to find a way to quarantine about $10 billion worth of troubled financial contracts.
The U.S. insurer said Tuesday that the contracts were credit default swaps, the same insurance-like type of contract that was at the heart of its liquidity crisis in September. But these contracts were insuring a different type of asset than the ones covered by the assistance package.
For that reason, they could not be quarantined in the special-purpose entity that AIG and the Federal Reserve were creating.
"We've got to figure out some other way of unwinding these," said a spokesman for AIG, Nicholas Ashooh. "We're working on it."
In November, AIG said it was creating a special-purpose entity to buy billions of dollars worth of complex debt securities, for which AIG had sold insurance. The securities have lost value, and as their insurer, AIG was subject to collateral calls that it could not afford.
As of September, AIG said that its portfolio of credit default swaps on the debt securities was worth about $71.6 billion. About $41.6 billion worth of those have already been bought by the special-purpose entity, Ashooh said. AIG has reached agreements to buy roughly $12 billion more, he said, but it has not been able to identify who is holding the underlying debt securities.
But about $9.7 billion of the original amount turns out to be ineligible to be bought, because the securities involved are not really securities. They are pools of derivatives that behave like debt securities.
Ashooh said that although the $9.7 billion worth of swaps had not yet been wound down, it could not lead to an open-ended round of collateral calls like the one that nearly toppled AIG in September. He said that was because not all of the contracts contained collateral provisions.
The $10 billion worth of unresolved obligations was first reported Tuesday by The Wall Street Journal.