AIG Origin huge loss
March 2, American International Group (AIG) officially announced its 2008 full year
and fourth quarter earnings report, the fourth-quarter net loss of up to 61.7 billion U.S.
dollars. Meanwhile, the U.S. Treasury and the Fed have jointly issued a press release,
AIG announced 300 billion in new capital injection.
&quot;The U.S. government thinking on the AIG bailout is already very clear,
that is, for the purpose of all to save AIG. Before the United States Government
should not intervene in the private sector is very mind, but now is
different.&quot; A Canadian hedge fund&#39;s chief investment officer of
the newspaper Liu Ying reporter said.
&quot;Lightening&quot; and &quot;assistance&quot;
The same day, AIG announced the establishment of AIU holding company, will be
AIG&#39;s commercial insurance business at present, foreign business and
property and casualty insurance business into a new holding company which AIU.
The original property and casualty insurance business, will become CEO of the new
In addition, AIG has also announced the creation of special entities, AIG holdings of
Asian business AIA (AIA) and the United States Life Insurance Company (ALICO)
would be placed in the special entity, for sale or public offering. The assets sold or
realized gains, will be used to repay federal loans to 60 billion U.S. dollars. New York
Federal Reserve Bank or its designated custodian, will become the manager of this
&quot;We believe this is the best, because the AIA and ALICO repay our debt
the U.S. government is very important. While taking into account the AIA and
ALICO&#39;s business development and maintain the commercial value they
deserve.&quot; Edward Lee Di said so.
Meanwhile, the Federal Reserve and U.S. Treasury jointly issued a press release, to
give AIG 30 billion U.S. dollars of new capital injection.
U.S. Treasury rescue once again reached for the reasons AIG, AIG&#39;s
collapse would cause the U.S. financial system, &quot;systemic risk.&quot;
&quot;AIG to 100,000 of the insurance institutions, including small businesses,
municipal-level government bonds, pension plans and many Fortune 500 companies,
which employ nearly 100 million Americans.&quot; U.S. Treasury Department
said in a news statement. &quot;In addition, AIG also holds 30 million American
policy, is a major non-profit organization for teachers and other agencies to provide
retirement insurance. And, AIG is one of many U.S. financial institutions trading
Not the market expected, in the new program, the Ministry of Finance announced that
AIG would have loans of 40 billion U.S. dollars to be accumulated from the priority
of debt securities to priority. This eliminates the AIG annual 4 billion U.S. dollars in
interest. At the same time, to give AIG 30 billion U.S. dollars of new
&quot;equity capital instruments.&quot;
In addition, prior to loan AIG 600 billion dollars in loans, the Fed will become a
priority in AIA and ALICO equity. Thus, in AIA and ALICO are sold or go public, the
U.S. Government can recover the investment.
Announced the news that day, AIG shares have rebounded after closing price of 47
cents / share, total market capitalization of 1.13 billion U.S. dollars. Day, the Dow fell
to 6763 points, its lowest level since 1997.
&quot;From the first notes into preferred securities, is directly injected into the
core capital of AIG. The government to do a lot to AIG to reduce the interest burden.
The U.S. government to do so, in fact, with the common shareholders have almost the
same. Preferred securities Usually there is no right to vote, that is not involved in
specific operations, but give priority to dividends. Therefore, it is between living in a
kind of debt and equity securities. &quot;U.S. Advent Capital Vice President
Kevin zhao reporter&#39;s interview explained .
Origin huge loss
AIG said in a news conference, as much as 61.7 billion U.S. dollars in losses, mainly
due to &quot;a further deterioration in credit markets, particularly real estate
securitization market, according to charge (MBS) in the fall, and the result of business
In AIG&#39;s financial statements, using obscure financial term describing a
very complex net loss of 61.7 billion U.S. dollars caused by a variety of reasons.
But the main reason there is only one, that is, according to charges and real estate
securitization market (MBS) market is closely related to the overall collapse.
Structural adjustments in the business, AIG suffered a loss of 6.7 billion U.S. dollars.
In October 2008 spun off before the two MBS items still to AIG
&quot;bleeding.&quot; One of the Maiden Lane II projects continue to
cause impairment of AIG 33 billion dollars in losses, while the other Maiden Lane III
also resulted in the loss of 3.4 billion U.S. dollars.
Second, the suspension of business caused by loss of 25.9 billion U.S. dollars AIG.
One pre-tax loss of 18.6 billion U.S. dollars is &quot;non-temporary
impairment&quot; (OTTI) project.
OTTI project is in accordance with the provisions of accounting standards, the value
of the assets of financial institutions should be &quot;adjusted to market
value,&quot; a great loss to the assets included in the accounting records. AIG
said in the earnings report, this part of the main loss is due to further deterioration in
MBS market, insurance companies MBS bond prices continue to fall,
AIG&#39;s CDS products sold to the amount of losses caused by rising.
Which AIG Financial Products in January 2008 from the application of accounting
standards FAS159 provision, profit and loss calculation of
&quot;actual&quot; as a criterion, in 2007, therefore a loss of 10.7 billion
Since the fourth quarter of 2008, AIG adopted FAS133 accounting standards more
stringent terms, beginning with &quot;But the market valuation of unrealized
gains and losses on the Adjustment adjustment&quot; calculation. Accounting
principles, the value of assets caused significant changes occur, resulting in pre-tax
loss of 17.2 billion U.S. dollars.
&quot;AIG are generally published quarterly financial assets. Well, according to
accounting standards, as long as they hold these CDS / MBS / CMBS by rating
companies downgraded the company will write-down, it has been handled as
non-performing assets.&quot; Kevin zhao said.
In addition, the loss on discontinued operations, as AIG&#39;s financial products
sector downgrade, resulting in the loss of 6.7 billion U.S. dollars.
Revenue loss on, AIG said that as a loss this season, failed to achieve tax relief, which
caused a loss of 21 billion U.S. dollars. Plus 3.6 billion write-down of goodwill,
intangible assets and therefore the loss of revenue up to 24.6 billion U.S. dollars.
However, AIG did not explain why the tax relief that can cause loss of up to 21 billion
Finally, AIG has to pay the Fed loan interest and amortization loans, totaling 6.9
billion U.S. dollars.
In addition to the huge loss of 61.7 billion U.S. dollars the fourth quarter, the year
2008, AIG losses totaling 99.3 billion U.S. dollars. This figure is equivalent to two
&quot;Madoff Century fraud&quot; by the total amount of fraud.
The reasons for the huge loss of the fourth quarter, is with the AIG at the time when
the U.S. housing bubble a lot of selling &quot;securities insurance&quot;
product-related. According to data from the end of 2007, AIG was for the 520 billion
U.S. dollars of MBS products do the CDS insurance for the nearly 80 billion U.S.
dollars of CDO products to do the CDS insurance, and AIG&#39;s investment in
its insurance sector has also bought nearly 90 billion U.S. dollars of MBS bonds .
Wall Street in the MBS market collapsed, AIG also with the decline of the market as a
&quot;AIG CDS issued by the insurance, its terms - that they agreed with the
default face value of debt incurred after the parties agreed upon residual value of the
difference between the bond.&quot; MBS senior Wall Street experts, Monkey
Business Blog founder Eric Salzman, the reporter details the trigger mechanism for
the huge loss of AIG.
&quot;For example, if a default event occurs, the face value is 100 yuan bonds,
you can get the residual value of 40 yuan. But you will not then go on to 60 dollars to
AIG. You will wait until the market has been deteriorating down, so AIG will pay you
more money. &quot;Eric said.
&quot;AIG used to be AAA ratings, but ratings were down last year in
September. After the rating was lowered, you can ask AIG for more collateral, the
counterparty can earn more.&quot; &quot;That is why the U.S. government
paid the 1520 100 million U.S. dollars, only to be the result of such a folly - have to
once again save the root cause of AIG. &quot;Eric said.
&quot;In fact, the U.S. financial system, the problems faced, not the MBS
market by market crashes and pricing issues. But the failure of the market pricing
mechanism.&quot; Deloitte U.S. corporate governance and capital market
consulting manager in Guangdong, Li told reporters &quot;This is a bigger
It introduced a number of Wall Street traders, after Lehman Brothers collapsed, out of
fear of loss, the banking system have to tighten credit, investment banks have lower
leverage and huge amounts of money disappear from the market. The MBS market,
very few transactions. If a small amount of trading is also part of the hedge funds to
take advantage of low risk assets acquired. Lack of both transactions, resulting in
distortions and distortion of market prices.
&quot;The market pricing mechanism problem, the entire financial system and
the hidden toxic assets, you can not really clean. All holders of MBS bonds, banks and
insurance companies, and thus can not really judge held the hands of the real MBS
products value. If the price is too low, the banking system not to sell these products on
hand, as it will result in the loss of carrying on. &quot;floor of a CDS trader Wu
Jiang at the time interviewed said.
MBS products can not flow in the bond case, its true value can not be reflected in
However, due to accounting standards require that public companies by market
pricing of these assets must Suizhao U.S. Jingjijinru deep recession, GDP fell in the
fourth quarter up 6.2 percent, the default rates on home mortgage Zhengti
Rengzaishangsheng, California Dengzhong hit has more than 7.2 %. S &amp; P
and other rating companies will be further down the ratings of some MBS Index.
Write-down of the entire banking industry and the loss was increased. Citigroup and
other banks have recently entered a &quot;nationalization&quot; sequence,
and further asset write-down of MBS have a great relationship.
&quot;This is a death cycle.&quot; Floor, Wu Jiang said.
This, AIG nearly 500 billion U.S. dollars as MBS bond insurers, because the CDS and
MBS bond prices of the debts of a high degree of inverse correlation, in the future
will be hit hard. Failure of the market pricing mechanism in the time, AIG&#39;s
loss will further increase, which will form the body of an Obama administration a
&quot;In fact, we all lost money in AIG, etc., as already MBS market collapsed.
Such compensation to the counterparty AIG the money, far more than the current
value of their MBS bonds.&quot; JP Morgan Chartered Financial Analyst Qin
unification in accepting newspaper reporter, said.
&quot;To solve the pricing problem no alternative failure, only to wait one or
two bankruptcies.&quot; Johns Hopkins University School of Business Professor
Philp Phan reporter&#39;s interview, said, &quot;so they just hand the
MBS bonds can sell. low prices that some companies are willing to buy. so the market
price mechanism will gradually be restored slowly. and other market transactions
increased gradually, the market will return to normal trading status, the pricing
function will be fully restored. &quot;
Insurance: AIG now like?
When problems in AIG, other insurers will be like? High in the housing bubble, these
insurance companies buy a lot of levels for the AAA rating of MBS products. U.S.
insurance industry, other companies, such as the famous city of the insurance (Met
Life) and so on, does it fall into the quagmire of a loss?
&quot;These companies are not the same as with the AIG companies, but they
did not AIG CDS product so much. But they also face a large number of corporate
bonds and commercial real estate securitization products, the risk of
exposure.&quot; Eric Salzman said. &quot;Our company has been the
insurance industry analyst with the insurance industry is very bullish. Because they
are related to AIG like, more consistent business model.&quot; Kevin zhao said.
However, some people hold different views. UBS Securities analysts that the Met Life
&quot;is worth buying.&quot; The reason is, Met Life has a very good life