Monday, October 13, 2008

A $100 billion margin collateral call?

That seems way too high, but I'll post this as a marker of the steps in the AIG collapse.

From David Paul:

In simple terms, AIG's collapse came as a result of the following sequence of events:

  1. 1. In the wake of the decline in real estate prices, the market value of mortgage-backed securities declined.
  2. 2. Under accounting rules that were established after the downfall of Enron -- implemented to require rapid disclosure of investment losses -- AIG marked down the value of its mortgage-backed securities portfolio.
  3. 3. These investment losses resulted in a reduction of AIG's capital reserves -- the core measure of its financial strength.
  4. 4. As a result of the decline in AIG's capital reserves, Standard & Poor's and Moody's Investors Service downgraded AIG from triple-A to the single-A level.
  5. 5. These rating downgrades to the single-A level triggered collateralization requirements under AIG's CDS contracts.
  6. 6. The amount of the collateral that AIG had to produce under its estimated $450 billion of CDS contracts approximated $100 billion.

And AIG did not have $100 billion in available funds.

Other accounts suggest that "the mortgage portfolio" really was a collection of CDS written on mortgage-related securities.

No comments: