Wednesday, November 12, 2008

More on AIG's CDO Special Facility

I missed it before, but the Fed's release actually says that AIG's CDS will be unwound, as part of the "multi-sector" CDO facility that it is setting up with AIG.

AIG had been "amortizing" $6 billion a quarter in mark-to-market losses. Assuming that defaults continue apace, causing more mark-to-market losses, this unwind will cut that (how much, it is hard to tell - possibly up to 60%). AIG will no longer have to run big losses through its income statement and worry about ratings agencies.

AIG says that stress losses could range from 7.8 to 12.0 billion. If I understand that calculation right, that's what they think the underlying CDO losses might be, in deteriorating circumstances. The Fed will end up with some part of those losses in the facility (depending on how much is bought), but AIG will cover the first 5.0 billion.

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