Posted on 02/12/2008 5:01:30 AM PST by TigerLikesRooster
AIG's derivative woes hit confidence
By Michael Mackenzie, Aline van Duyn and Stacy-Marie Ishmael in New York
Mon Feb 11, 4:40 PM ET
Confidence in the credit markets suffered a fresh blow on Monday after AIG, the insurance group, disclosed problems with valuing its derivatives portfolio.
Measures of credit risk in both the US and Europe reached record levels, indicating widespread risk aversion. The news from AIG followed last week's pressure on the credit markets amid fears about a rise in corporate and commercial property debt defaults.
In the US, the cost of buying protection against the default of investment grade companies rose to 136.75 basis points, up from 130bp. The European version of the benchmark was trading over 100bp for the first time, while the so-called crossover index of companies of mainly high yield credit ratings rose above 550bp.
At the same time, the LCDX, the index that tracks the value of US high-risk leveraged loans on Monday fell to 90.8, a historic low. The LevX, which tracks European leveraged loans, fell to 90.5, also a record low.
In times of credit stress, these highly liquid credit derivative indices become attractive to buyers of credit insurance. However, as their spreads widen, more investors are forced to liquidate structured debt, the value of which is partly determined by the indices. The spiral gets more pronounced the wider spreads go.
"The risk in this cycle is that for the near-term the wider spreads get, the more forced selling it brings and the more it increases the risk of structured products unwinding," said Jim Reid, analyst at Deutsche Bank.
As stocks and credit sank, US Treasuries were the recipient of safe haven buying.
"The market's current strength is largely a function of stocks, with a bit of influence from AIG's earlier disclosure of weakness in its derivatives account," said David Ader, bond strategist at RBS Greenwich Capital.
Ping!
I hope the bandits go broke, they robbed me blind long enough.
Ditto here. AIG insured my autos when I lived in CT...about $1700 a year.
In 2006, we moved to Florida, same vehicles, rural Florida, they wanted $3000 overnight.
I shopped and found $1900 from a FL auto insurer. After I changed companies they went back to the DMV in CT and canceled my (non-existent) coverage all in an attempt to punish me.
Let AIG go broke.
I think this “accounting problem” “contributes” about another $4B to the big CDO-writeoff account in the sky. We’ll see that officially above $200B by the time most of the 1Q 2008 earnings reports are out.
According to J.D. Power, AIG is the worst insurer.
This isn’t related to CDOs at all. These losses were due to widening of spreads on default risk derivatives. Such losses are not actually incurred by AIG as a cash outflow, but rather just reflect the difference in what they are receiving as a yield compared to what the current market rate is. Spreads are getting ridiculous right now. I wish I had a lot of excess cash to invest, because there is a lot of money to be made in debt instruments.
Those default risk derivatives were for CDO’s: http://www.marketwatch.com/news/story/aig-says-actual-losses-cdo/story.aspx?guid=%7B5E200796%2D3424%2D44EA%2DB8F0%2DB35F0C12D2A7%7D&siteid=yhoof
Yep, you’re right. Still, these are not realized losses and reflect widening of spreads, not defaults.
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