AIG Shocks Wall St.:Financials Free Fall After Hours

Happy Thursday!

Well well well what a shocker after hours. AIG, one of the biggest insurance companies in the world, reported a $7.81 billion loss for the first quarter. This was double the loss that analysts were expecting. The news is all over the wires but here it is from Marketwatch:


"SAN FRANCISCO (MarketWatch) -- American International Group reported a $7.81 billion first-quarter net loss late Thursday as the giant insurer was hit hard by the credit crunch.

AIG shares dropped more than 7% to $40.75 in after-hours trading. Ratings agency Standard & Poor's downgraded the company and several subsidiaries to AA- from AA. AIG's big aircraft-leasing business was cut to A+ from AA-.

"Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations," S&P credit analyst Rodney Clark said.

The worse-than-expected results were driven by a $9.11 billion write-down on a credit derivatives portfolio and $6.09 billion of net realized losses from AIG's investment portfolio.

AIG also said it plans to raise $12.5 billion by selling new shares, equity-linked securities and fixed-income securities with a large equity component included.

Still, AIG increased its dividend by 10% and Chief Executive Martin Sullivan said the company's main insurance businesses continue to perform "satisfactorily."

A lot of AIG's problems are centered on collateralized debt obligations (CDOs), complex securities that are partly backed by mortgage securities.

The unit's credit derivatives portfolio had a net notional exposure of $505 billion at the end of September, as the mortgage meltdown was spreading into a global credit crunch. More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, according Fitch Ratings."


My Take:

I thought the worst of the credit crunch was over?..yeah right. These numbers are horrifying. Whats even more frightening is the half a trillion dollar exposure they have in derivatives as of September. God knows what these are worth and how much is left on the books.

If they puked up $9 billion in derivative losses this quarter, what are the losses going to be on the other $505 billion as housing continues to drop in value? Notice this line from the article:

"As house prices have fallen and delinquencies and foreclosures surged, the market value of these securities dropped sharply."

Housing isn't done dropping ladies and gents. Not even close. The write downs will continue quarter after quarter as long as housing bubble continues to burst.

Something else to consider here is there are no Fed bailouts in insurance. This is not a bank. This company is on its own when it comes to handling these losses.

What cracks me up is they also announced they plan on raising the dividend. Do they think we are fools?? You lose $8 billion and I am supposed to be happy because u raised my divedend? Where does the insanity end?

Bottom Line:

Companies like AIG are not supposed to have losses like this! You can put AIG right up there with GE and IBM in terms of prestige. This is one of the strongest companies in the world.

This is a pure example of how devastating this credit crunch/housing collapse is. Anyone thinking they threw out the kitchen sink this quarter is sadly mistaken when you look at their potential derivatives exposure.

The price of these derivatives keeps dropping because housing keeps tumbling. No one even knows how to price a lot of this stuff. The whole thing is just a financial disaster.

Notice S&P almost immediately dropped their rating after seeing these earnings. The financials tumbled after hours after the AIG news hit the wires. Expect the financials to get punished tomorrow.

The financials were bold and full of testosterone as they threw risk out the window when the housing bubble boomed. We are now beginning to see the damage on the way down and the losses are staggering.