Insurer AIG posts fourth-quarter ($3.2 Billion)loss on write-downs (of derivatives)

[UpInArms]

Source: Reuters

NEW YORK (Reuters) - American International Group Inc (AIG.N: Quote, Profile, Research), the world's largest insurer, swung to a large fourth-quarter loss, hurt by a write-down of derivatives exposed to bad mortgage investments.

AIG said on Thursday its fourth-quarter loss was $5.29 billion, or $2.08 a share, compared with a profit of $3.44 billion, or $1.31 a share, in the year-ago quarter.

AIG, a multi-line carrier which offers property, commercial and life insurance, said its adjusted fourth-quarter loss, which excludes capital gains, losses and hedging activity, was $3.2 billion, or $1.25 a share.

Read more: http://www.reuters.com/article/bondsNews/idUSN2854656120080228

[Warpy]

1. Derivatives are so exotic nobody knows how to value them

but it's estimated something like $405 trillion of the world's wealth is represented by them.

When everybody starts to notice they have no intrinsic value, the world economy will simply collapse. Good luck to us all.

[Deny and Shred]

2. Another $11.12 billion lost to the credit derivative mess.

With notional credit derivatives in the trillions, this may get much uglier, and put some serious downward pressure on the dollar.

http://www.bankcollapse.com/category/bank-of-america

The first article on the link explains credit swaps pretty well. Kind of heady, but that's to be expected.

[UpInArms]

3. thanks for the link - you're right - it was a clear explanation

and here's some from your link:

This party, as many will relate, is the explosion in credit default swaps (CDS) that has appeared over just the past few years.

Structured finance has been around since the 1980s, but the CDS market is essentially brand new. The CDS was invented in the mid-1990s but it was minor until the last four years. Since 2003, this market has exploded in size by 10 times, to a total notional amount of about $45 trillion.

Yes, that’s trillion with a “t”.

This market has never been tested in any kind of economic downturn, not even the most recent one of 2001-2002. We might see that test soon, however.

The credit-default swap is insurance against a credit accident. The seller of CDS receives a small monthly payment. If the insured bond fails to perform, the buyer of CDS receives a large one-time payment from the seller. At first, in the 1998-2002 period, this was mostly a way for holders of bonds to insure themselves. However, in recent years, the CDS market has become a way for CDS buyers to wager on credit deterioration, and a way for CDS sellers to act like banks.

Banks are a wonderful business, when everything is working right. They have returns on equity that can range from 15% to as much as 25%. These are the kinds of returns that get hedge funds, and their investors, interested. However, it is difficult to enter the banking business. You need offices, branches, depositors, employees, advertising, and so forth.

Banks traditionally profit on the interest rate difference, or “spread”, between the money they borrow, from depositors for example, and the money they lend, to corporations for example. They may lever up ten to one, supporting $100 billion of assets on $10 billion of equity. Thus, if their spread is 2%, and they are levered 10:1, their return on equity is a juicy 20% (actually more like 24% because of the return on the underlying capital).

The CDS contract allowed hedge funds to act like banks. The monthly premium on the CDS is a spread between the equivalent Treasury yield and the implied yield on the underlying bond. This can be considered payment for the risk of default, which the Treasury bond presumably does not have. Imagine you’re a fund with $1 billion in capital.

and here's a belated welcome to DU!

:hi:

[Jacobin]

4. Well, then, its time to raise insurance premiums

for homeowners, because these asshats gambled the fucking reserves away.

this country is run by psychopaths.