February 27th, 2010

AIG Bailout: A $8.9 Billion 4^th Quarter Loss Could Create A Second Bailout.  Remember during 2008 when the credit market collapsed and AIG received a bailout, even though groups of employees enjoyed lush spa trips? It appears as if the bailout that was meant to salvage the company may not have been enough to turn them around.

Call it throwing good money after bad, or whatever you want but it was just reported that AIG suffered an $8.9 billion 4^th quarter loss during 2009.  Such a massive loss could indicate the need for a second bailout should the company wish to survive.

One of the situations that caused the need for the bailout was the use of credit default swaps.  This type of hedging instrument is typically used in mortgage backed securities, corporate bonds, government bonds, and emerging market bonds.  Basically, someone purchases a guarantee that will give them a lump sum payment should a debtor default on their obligations.

Historically, the CDS was a way for investors to sleep soundly at night know that they wouldn’t lose millions or billions of dollars if, for instance, the entire subprime mortgage industry collapsed (which no one thought would happen, anyways.)  The underwriter pretty much rested assured that they were getting paid the purchase price, and figured they wouldn’t have to pay out a claim.

Fast forward to 2008 when the subprime mortgage industry collapsed.  AIG underwrote lots of these hedge funds and were left holding the bag for billions of dollars of payouts for Credit Default Swaps purchased.  Add that to the horrific economic climate and you have a recipe for failure.

Thank goodness for Uncle Sam, right? Without the US Government, AIG would have went under like Lehman Brothers and those who purchased various hedging instruments and insurance would have been left high and dry.

The AIG bailout amounted to $180 billion – which they now have to figure out how they are going to pay back.  The over $60 billion loss in the fourth quarter of 2008 is far greater than the $8.9 billion quarterly loss posted in 2009.  Analysts and investors thought the performance would be better.

Initially, the company said they were going to use cash flows from the proceeds of life insurance policies to pay down their debt, but that may not work out. 

If the company doesn’t come up with a plan and keeps hemorrhaging money – will they need a second bailout? Only time will tell.

Source:

Investorguide.com

EconomicsHelp.org