Monday, 11 February 2008

The value of A.I.G.'s portfolio of credit default swaps fell by $6 billion in October and November, according to a regulatory filing. Previously, the company announced that its value had dropped by just $1.1 billion in that period. It hasn't yet determined their decline for the full fourth quarter. The disclosure underscores the uncertainty surrounding the value of collateralized debt obligations and other credit instruments that have declined as defaults on mortgage payments have increased. The swaps in A.I.G.'s portfolio are contracts based on the risk of default on securities like C.D.O.'s. (Here is an explanation of C.D.O.'s)Indeed, many economists believe that the $120 billion in write-downs that investment banks have already disclosed may just be the beginning of worldwide credit losses stemming from the subprime mortgage crisis. Over the weekend, German finance minister Peer Steinbrück said that the finance leaders from the Group of Seven nations expect the losses to reach $400 billion. Other economists put the figure as high as $500 billion, but the U.S. Federal Reserve is still estimating that the losses will reach only $150 billion. "There remains a risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year," the Financial Stability Forum indicated in a report presented to the finance leaders in Tokyo. "It is likely that we face a prolonged adjustment, which could be difficult."



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