AIG Downgrades of Monday Do Not Trigger Collateral Posting for Swaps, But $14 Billion Needed ASAP

I’ve revised the post since first putting it up, since the point of the two excerpts (assuming the reporting is correct) is that whle the AIG ratings downgrades did trigger the need to post additional collateral, it did not do so for swaps-related exposures. A senior debt downgrade would lead to the need to put up even more collateral for swaps-related exposures.

The New York Times provided a teeny bit of good news on the AIG front, but AIG needs support, pronto, or it will start unraveling:

But none of those downgrades appeared to lead to events requiring A.I.G. to post billions of dollars of collateral to its swap counterparties. Its swap contracts cite downgrades by Moody’s and Standard & Poor’s of A.I.G.’s long-term senior debt ratings, and such changes had not been announced as of Monday evening. Being downgraded by two other widely watched ratings agencies, and having its standing as a counterparty by Standard & Poor’s downgraded, did not bode well for A.I.G., however.

People briefed on the matter said that if JPMorgan and Goldman Sachs were able to raise a $75 billion credit line by Tuesday, it could avert the all-important debt downgrades by Standard & Poor’s and Moody’s. But it was unclear whether they could put together such a complicated package in time.

A.I.G. has also considered sales of virtually all of its business assets, but conducting such sales quickly would be hard.

The Wall Street Journal gives the other side of the coin:

American International Group Inc. was facing a severe cash crunch last night as ratings agencies cut the firm’s credit ratings, forcing the giant insurer to raise $14.5 billion to cover its obligations….

AIG has been scrambling to raise as much as $75 billion to weather the crisis, and people close to the situation said that if the insurer doesn’t secure fresh funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

“The situation is dire,” a person close to AIG said…..

One sliver of optimism for AIG last night was that much of its exposure is related to credit default swaps….AIG’s counterparties on these instruments include many Wall Street firms, which may have an incentive not to demand more collateral so as not to trigger a wider panic.

But many of AIG’s counterparties are based in Europe and Asia and may have less interest in helping to prop up the firm. The market for credit default swaps is immense, trading against about $62 trillion of debt. Many participants in the largely unregulated market worry that the default of a major player such as AIG could trigger chaos….

Indeed, the company’s woes could pose problems in many corners-a concern that has the federal government on watch. AIG’s massive assets mean that its millions of traditional insurance customers will likely get claims paid, no matter what happens next. But AIG’s shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks.


Originally published at Naked Capitalism and reproduced here with the author’s permission.