More losses are in store for flailing

American International Group

(AIG) - Get Report


The already beaten-down insurer announced in a regulatory filing that it could face additional losses on the credit default swaps remaining on its books.

Credit default swaps, of course, are insurance contracts ostensibly protecting an investor against default on an underlying investment. The underwriting of risky contracts is what ultimately led to AIG's demise and resulted in the need for the $180 billion bailout from the government.

As of March 31, AIG held about $192.6 billion worth of such swaps, which were primarily written for European financial institutions. Continued declines in the value of the contracts may have a "material adverse effect" on financial results, according to the filing submitted late Monday to the Securities and Exchange Commission.

Most of the swaps are protection against default on underlying corporate loans and residential mortgages. As the value of those underlying loans and mortgages fall, the value of the swaps declines as well -- all of which would, of course, force AIG to take unrealized losses on its portfolio.

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