Why is AIG in trouble?
The turmoil in housing and credit markets has hammered AIG, largely because of contracts it sold protecting others against losses tied to subprime loans and other risky assets. AIG's stock has fallen nearly 80% this year. It reported a second-quarter net loss of $5.36 billion last month after a first-quarter loss of $7.81 billion.
The cut was from AA- to A- on senior debt; the A-2 is the counterparty risk rating.
This downgrade triggers the requirement that AIG post more collateral. I am looking for confirmation, but this is what I saw in terms of consequences. From Bloomberg:
A ratings cut may have ``a material adverse effect on AIGs liquidity and trigger more than $13 billion in collateral calls from debt investors who bought the swaps, the insurer said in an Aug. 6 filing. AIG has already posted $16.5 billion in collateral through July 31. A downgrade could also set off early termination of swaps that may cause $4.6 billion in payments, AIG said.
The is going to lead to massive counterparty defaults in the credit default swaps market, an event we and others had warned about for some time. The CDS market was the most likely culprit to cause a systemic unwind. God help us if the authorities are not prepared.
http://www.nakedcapitalism.com/2008/09/brace-for-tsunami-fitch-s-downgrade-aig.html
In addition to the above vicious cycle triggered by their lowered rating, AIG stock is down some 79% or more in value year-to-date, so they have lost a hell of a lot of investment capital this year. That doewn’t help their liquidity one little bit.