AIG toxic swaps to last years

AIG may have to bear the risk of losses on corporate loans and mortgages beyond the company’s expectations, complicating US efforts to stabilise the firm, Bloomberg reports.

David Havens, managing director at investment bank Hexagon Securities says European banks, including Societe Generale and BNP Paribas, hold almost $200bn in AIG guarantees allowing the lenders to reduce the capital required for loss reserves. These firms may keep the contracts to hedge against declining assets rather than cancelling them as AIG expects.

“For counterparties to voluntarily terminate those contracts makes no sense,” Havens said. “There’s no question that asset values have soured on a global basis. With the faith and credit of the US government backing those guarantees, why would they give that up?”

Time is the enemy

AIG has revealed how long it is exposed to various contracts:

• European swaps protecting residential loans - 25 years
• Corporate loans - 6 years,
• Corporate loans in the Netherlands - 45 years,
• Swaps on mortgages in Denmark, France and Germany - 30 years.

AIG claims the portfolio shrank by about half in 15 months to $192.6bn and that banks will cancel “the vast majority” of the contracts in the next year.

But last month, AIG said in a regulatory filing that it may be at risk for losses for “significantly longer than anticipated” if the banks don’t terminate their swaps.