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Calculating A.i.g.’S Big European Exposure

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The waves of financial trouble rippling across Europe could end up splashing on one American institution: the American International Group.

The American public and lawmakers whipped up a major outcry last year upon learning that the government’s bailout of the insurer had helped a number of European banks. Since then, A.I.G. has sought to unwind its derivatives business, which gave it a big exposure to Europe.

By now, A.I.G. had hoped to rid itself of a set of credit default swaps that it sold to European banks to help them comply with capital requirements. But regulatory filings show that the company still has significant exposure to these institutions at a time when Europe’s financial picture is awash in uncertainty.

A spokesman for A.I.G., Mark Herr, declined to name the European banks that bought the swaps or otherwise comment beyond the regulatory filing.

By acquiring the swaps from A.I.G., which promised to make the contract purchasers whole if the insured assets soured, the European banks could keep riskier assets on their books without running afoul of capital requirements. The assets in question consist mostly of pooled corporate loans and residential mortgages.

A separate portfolio of C.D.S. contracts nearly toppled A.I.G. in September 2008, although those swaps were tied to more complicated and harder-to-track assets. A.I.G. has said that the swaps purchased by European banks are less risky.

A.I.G. had hoped these swaps would become obsolete at the end of 2009, when European banks were expected to have adopted a new set of capital adequacy rules collectively known as Basel II. Since the contracts were designed to help banks comply with the simpler Basel I rules, the insurer thought the swaps would serve no useful purpose after the changeover and could be terminated without incident.

But international bank regulators have yet to fully adopt Basel II, throwing a wrench into A.I.G.’s plans to phase out the derivatives business.

The firm’s said in its quarterly filing that “it remains to be seen” which capital adequacy rules will be used in different parts of Europe. Meanwhile, some of its bank customers may not terminate their contracts “in the expected time frame,” A.I.G. said.

A.I.G. said its counterparties were holding the loans and mortgages in blind pools, making it hard to know how they are faring the European storm. Some debt pools have fallen below investment grade.

On the other hand, A.I.G. said the pools were not generally concentrated in any industry or country, with an expected average maturity of a little less than two years. A.I.G. said that it has been getting regular reports on the blind pools, and that losses so far have been modest.

It seems ages since I've read anything about the wonderful AIG, and now the wait is over. Looks like the US taxpayer may end up paying for the Greek bailout one way or another.

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Since the contracts were designed to help banks comply with the simpler Basel I rules, the insurer thought the swaps would serve no useful purpose after the changeover and could be terminated without incident.

That's my favourite bit. Were they set specifically to end when Basel II came in or were AIG hoping the banks would feel they didn't "need" them any more as they didn't *HAVE* to have them? In the same way if I lose my job I wont NEED a car to get to work anymore, so I'll just give it away...?

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  • 444 Brexit, House prices and Summer 2020

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