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AIG still facing huge credit losses

AIG, the insurer controlled by the US government, still faces billions of dollars in potential losses on credit guarantees it provided for complex subprime mortgage securities, in spite of its $62bn fourth-quarter loss and regulatory efforts to unwind its holdings, company filings show.

The difficulties the authorities face in dealing with AIG spilled into the open on Tuesday as Ben Bernanke, Federal Reserve chairman, expressed anger with the company in an appearance before the Senate budget committee.

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” he said. “There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”

The crisis at AIG stemmed from its activities in the market for credit default swaps – derivatives that function as debt insurance. AIG was particularly active in providing guarantees for securities known as collateralised debt obligations, bonds backed by debts such as subprime mortgages.

AIG ran into trouble when its credit rating was downgraded and the value of the CDOs it insured fell, which forced it to post tens of billions of dollars in additional collateral with its counterparties. This process exhausted its resources and prompted the government rescue of the company in September.

[ Article originally posted on FT.com] Continue reading

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