AIG Posts Massive Losses

The news that really caught my eyes this morning was about AIG, AIG posts 1Q loss of $7.8B, plans to raise $12.5B in capital

• American International Group Inc. said Thursday that it swung to a first-quarter loss of $7.81 billion because of losses tied to credit swaps and mortgage-related operations and that it plans to raise a total of $12.5 billion in new cash to shore up its capital base..........
  
  Like so many other financial services firms, AIG has been hit hard by deterioration in the credit markets. As defaults sharply increased on mortgages beginning in the middle of 2007, investors shied away from purchasing all but the safest debt. Because of the illiquidity in the credit markets the value of risky debt has plummeted, forcing firms like AIG to reduce the value of their investments in products such as credit default swaps and mortgage-backed securities.
  
  "While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," Martin Sullivan, AIG's president and chief executive, said in a statement.
  
  New York-based AIG lost $9.11 billion in its credit-default swaps portfolio during the first quarter. The swaps promise to cover losses on $579 billion in bonds or other kinds of debt. AIG recorded an $11.12 billion loss on the swaps portfolio during the final quarter of 2007.
  
  Losses in its investment portfolio, which includes debt backed by troubled mortgages, totaled $6.09 billion. It booked a $3 billion loss on the portfolio a quarter earlier.....
  
  Shares of AIG tumbled $2.70, or 6.1 percent in after hours trading to $41.45, after closing at $44.15 in the regular session.

That statement from the chief executive was incredible!

"... Decline in value of our investments were beyond our expectations".

What do you really expect when your company indulge in such toxic investments????

And this was reported on CNBC website, AIG Loss Wider than Expected; Shares Plunge

Insurance companies getting caught in this mess???

Really scary.

Here's another article, Who Has More Level 3 Assets Than Capital?

• Level Three assets include real estate, mortgage-backed securities, private equity investments and possibly even "undertakings of great advantage, but nobody to know what they are" (cf. South Sea Bubble).
  
  The three magic words that make an asset a Level 3 asset are "no observable inputs." What this means is that not only are they hard to price, but nearly impossible to sell.
  
  Recently there's been such deterioration in all types of mortgages that more and more assets are finding their way into this category. Also, this is the first time insurance companies have made the list. I think the list will continue to grow.
  
  Ten companies now have more Level 3 assets than capital. In order they are (as a % of total shareholder equity:
  
  1) Bear Stearns (BSC): 313.97%
  2) Morgan Stanley (MS): 234.88%
  3) Merrill Lynch (MER): 225.4%
  4) Goldman Sachs (GS): 191.56%
  5) Lehman (LEH): 171.18%
  6) Fannie Mae (FNM): 161.48%
  7) Northwest Air (NWA): 142.02%
  8) Citigroup (C): 125.06%
  9) Prudential (PRU): 119.36%
  10) Hartford (HIG): 108.52%
  
  So now we have insurance companies joining the party. Yes, the contagion is spreading and no, it's not over. Not even close. C just had to pay 8.5% for $2 billion in preferreds. One of these days, there will be no takers.