Who will Survive AIG or the Derivatives Nightmare?
The question is will AIG survive? AIG has basically two terrible choices, they can sell prized assets to their competitors or they can
give a large portion of their business to the US Govt. AIG is faced with huge losses. The US government is trying to keep the giant
insurer from failing thus causing a falling dominoe effect on other institutions and companys. Remember the word counterparty risk.
AIG sold all types of Derivative productives and if these start failing Pandora will surely exit her box. The dominoes will not just fall…
but cascade. This is why the US government is so keen on not letting AIG fail.
The problem is AIG is hemorraging cash. AIG’s need for liquidity is growing so quickly that $8 billion, or even $11 billion, would not help.
A virtual black hole. AIG is to report 4th quater losses of approx $60 billion next week. This type of loss on could initiate a domino
effect as discussed.
Initially a credit downgrade would occur then collateral calls and if AIG failed to produce the required amounts, the financial
institutions holding its contracts would have to recognize losses of their own. The dominoes would start falling & companys
would erode their capital bases and thus at risk of a downgrade.
Now is the time the derivative monster is emerging from Pandoras box.