Could the resurgence of American International Group Inc. (NYSE:AIG) be led by the very things that laid it low in the first place -- credit default swaps?
The troubled insurer has reportedly reaped over $3 billion in payments from credit default swaps in recent months, according to
The Wall Street Journal. It was those same swaps that drained AIG of cash last September, leading the company to the edge of bankruptcy and resulting in a government bailout.
Credit default swaps act like insurance against a company defaulting on bond payments. Issuers agree to make a contract buyer whole in the case of a debt default in exchange for incremental payments over a specific amount of time. As the financial crisis worsened last fall, AIG was forced to ante up billions in collateral to its counterparties as the risk-related spreads on the swaps soared.
Although Treasury got AIG out of many of the contracts -- controversially paying counterparties
100 cents on the dollar for $62 billion in swaps -- the remaining securities have often turned back into AIG's favor as the crisis has abated and swaps spreads fell.
How much money AIG has seen come back in isn't clear, the WSJ report said, but "the amount of collateral AIG's trading partners held declined by more than $3 billion between the end of the first and second quarters, according to AIG's filings with the Securities and Exchange Commission."
While the immediate danger to the company from credit default swaps may have faded (thanks primarily to the explicit government guarantees), the chances of AIG remaking its fortunes using the instruments is the longest of long-shots. With AIG still the poster-child for the danger posed by poor handling of credit default swap exposure, it's unlikely that AIG's management and overseers at Treasury and the Federal Reserve would tolerate the insurer's financial products division becoming a big player in writing those contracts again. -
George White
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