naked capitalism

While recent news reports have tried to put a cheery face on the AIG bailout as asset sales are moving forward haltingly, the end game appears no better than it did some months ago, at least according to Citigroup. Note that the amount authorized for bailout is $180 billion,”only” $134 billion has been committed to date. The Citigroup analyst suggests the taxpayer may just get out whole on the loans, but one has to wonder whether he is merely steering clear of voicing an opinion on the debt, since that is not his beat anyhow. Regardless, this report raises doubts about full recovery of the funds, much the less any supposed upside.

From Reuters (hat tip reader Joe C):

American International Group Inc, the insurer rescued by a series of federal bailouts, may have zero equity value due to the risk of more credit default swap losses and the disposal of key assets at low valuations, Citigroup said.

Shares of the company fell 22 percent to $10.22 in early trade Thursday on the New York Stock Exchange. The shares have lost more than 90 percent of their value in the last year.

Potential markdowns in AIG Financial Product unit’s regulatory CDS portfolio may result in collateral calls that would again put pressure on AIG’s liquidity, Citigroup analyst Joshua Shanker said.

Yves here, If I am not mistaken, those “regulatory CDS” are the infamous $300 billion provided to allow European banks to lower required regulatory capital, and if so, the article puts a lower value on it, suggesting writedowns have already occured. Some readers have said those were used to hedge AAA rated structured paper, like CDOs (eek). I am not sure of how this trade worked (Basel II arcana, needless to say) but I believe unhedged AAA was treated as needing only 20% as much equity as riskier credits (A or BBB equivalent?). UBS was big in this practice, and the CDS may have been the reason the bank was able to carry only 1% equity against assets.

Any readers who know details, please elaborate or correct. If you prefer, you can e-mail me at yves@naekdcapitalism.com and I will amend the post as needed. Back to Reuters:
“Such collateral calls could also pressure rating agencies to lower their credit ratings for the company, leading to a similar

cycle to the one that the company experienced prior to the massive government intervention in the third quarter,” Shanker wrote in a research note.

Last month, AIG revised its 2008 annual report to add a new risk factor that shows it may recognize valuation losses on a CDS portfolio if credit markets continue to deteriorate.

At issue is a super senior CDS portfolio held by AIG Financial Products with a notional value of $192.6 billion as of March 31, 2009….

The analyst said while AIG may be able to repay U.S. investment and some debt with core asset sales, the remaining businesses may be those that generate lower return on equity, handicapped by a high debt burden.

In June, the federal government agreed to accept $25 billion of preferred stock in two AIG businesses as partial repayment of debt.

AIG had said the agreement positions its two businesses — American International Assurance Co Ltd (AIA) and American Life Insurance Co (Alico) — for initial public offerings, depending on market conditions.

Shanker said it expects AIG to carve out its commercial property and casualty business in the form of an initial public offering in 2010.

The analyst, however, said there is high probability that selling off all operations just to cover debt will leave the holding company with little or no equity.

AIG had already agreed to sell a 98 percent stake in its Russian consumer finance business to Banque PSA Finance SA, a unit of France’s Peugeot SA (Paris:PEUP.PA – News), and is selling its credit card business in Taiwan to Far Eastern International Bank.

AIG’s bid to sell its Taiwan insurance unit, Nan Shan LIfe, attracted bids from global investors Carlyle and Primus, among others and could fetch more than $2 billion.