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AIG's Evaporating Balance Sheet


Subprime losses pile up for insurer, wipe out $15 billion.

Wall Street knew the fourth quarter at AIG (AIG) would be bad, but few thought it would be this bad. The travails of the largest property and causality insurer in the United States show just how quickly eroding values of derivatives on derivatives can get out of hand:

  • $5.3 billion loss in the 4Q, the largest in the firm's 90-year history
  • $11.1 billion in writedowns on credit default swaps backing subprime CDOs
  • $2.6 billion in writedowns on its general investment portfolio
  • $6.2 billion in annual income, down 56% from last year

Earlier this month, AIG spooked investors with news its auditors had found a "material weakness" in its accounting systems and that it would take larger than expected losses on subprime derivatives. The company revealed that writedowns for October and November would be close to $5 billion; writedowns in December accelerated to over $6 billion. Minyans wanting a reminder of how writedowns can effect a company's balance sheet should review Professor Depew's insightful -- and hilarious -- primer on credit-related writedowns.

Financial markets haven't exactly stabilized since the beginning of the year, as concerns over solvency at bond insurers Ambac (ABK) and MBIA (MBI), coupled with failing auction rate securities markets, have struck fear in the hearts of investors. It's safe to assume AIG's results for the first two months of 2008 likewise haven't improved much.

The company said that, although writedowns may have a material effect on operating results for a single reporting period, they "will not be material" to the company's financial condition. The evaporation of over $15 billion in asset value evidences how easily derivatives created out of thin air can disappear into that same vacuous space.

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No positions in stocks mentioned.

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