Category: credit default swaps

AIG becomes the other shoe

As we pointed out last Fall the credit crisis would eventually lead to the CDS reality TV show. Today, AIG reveals a small discrepancy in their “internal valuation models” regarding CDS:

AIG shares have dropped 11% today after the company said its credit derivatives portfolio lost $4.88 billion in market value in October and November — far greater than the company’s previous estimate of $1.15 billion in losses.

The company insures collateralized debt tied to subprime mortgages and other risky investments, but the positions they’ve taken in this market are hurting them now due to declines in valuation and other reasons.

“Although there is no immediate sign of defaults on these senior tranches, spreads are considerably wider and accounting for that means mark-to-market losses hit the balance sheet,” says Tim Backshall, chief credit derivatives strategist at Credit Derivatives Research in Walnut Creek, Calif.

My comments: This is the first of many “price discovery” stories unfolding on the derivative front. As I pointed out last year many of these auditing firms don’t want to be the next Arthur Anderson. Have we learned anything from the Enron era?

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