New questions are being raised about the financial position of the insurance giant American International Group.
The company has already received a massive federal bailout worth as much as $150 billion, but several published reports Wednesday have said AIG faces an additional $10 billion in losses not covered by the bailout.
$10 Billion Owed
The information was included in a federal filing and was reported by the Wall Street Journal, though AIG says it was no secret and that it had already been publicly disclosed. The Journal said AIG had made nearly $10 billion in a certain kind of derivatives trade. Essentially, it bet on the direction the market would take. Those bets have now gone sour, and AIG owes nearly $10 billion to some of Wall Street's biggest banks.
AIG already owed a lot of money and is getting federal help to pay it back.
Christopher Whalen, managing director of Institutional Risk Analytics, says these trades appear to be different from other AIG trades.
"These aren't even securities. These are just derivative contracts," Whalen says. "There's nothing there. These are just bets that are being honored."
Seeking A Solution
Until now, Whalen says, the federal government has been helping out AIG by buying up some of the securities that underlie a lot of the bad debt. But in this case there are no securities. These trades were a big, speculative bet. There is nothing for the government to buy, and AIG will have to come up with another way to pay the debts off.
"I don't think AIG can work their way out of this problem," Whalen says. "In other words, the wagers that are on their books are all now going to go into the money and they don't have the funding. Voila! We just found another $9.7 billion in trades that don't have funding."
AIG says it is looking for ways to handle the debts. A company spokesman said AIG still has plenty of capacity under the federal bailout. Since September, the government has committed $150 billion through loans and stock purchases.
The spokesman said he did not expect these latest trades would require any additional money from taxpayers. Still, the news reports of the trades generated much criticism.
Campbell Harvey, professor of finance at Duke University, says the trades raise two big problems regarding the government's bailout of AIG. First, he says, nobody really understands the full scope of the company's losses.
"It shows that we didn't really understand what we were buying when we went in and dropped $150 billion, and No. 2, it's the cockroach problem — that you see this $10 billion and you wonder how much is behind the walls that we don't know about yet."
That view is echoed by Janet Tavakoli, a consultant who specializes in structured finance. She says the nature of AIG's losses is still poorly understood, in part because the company has not been transparent enough about its holdings.
"Given the mishaps now that AIG's management have made since the bailout, it just seems that they haven't provided the level of detail and disclosure they should have provided," Tavakoli says. "To have a surprise like this is very disturbing, and one wonders why the managers at AIG are remaining in their place."
Tavakoli says the news of these trades underscores the murky nature of AIG's finances.
It also suggests that the reverberations from the company's collapse could be felt for some time to come.