Tuesday, September 16, 2008

AIG - The Next Shockwave?

Despite sell-offs on an unprecedented scale many are observing that 'it could have been worse'. This, you would imagine, would give hope to the market that we have not reached a panic selling situation, unfortunately we still have a huge monkey on our shoulder; American International Group (AIG).

The worry is that today we are going to see the failure of the giant insurer and that would bring blood on the screens again.

Matt Cheslock, a senior specialist at Cohen Specialists said "If AIG fails tomorrow morning, it's the same thing written all over this market, I don't think anyone is going to want to take any positions overnight."

The Federal Reserve refused to provide temporary financing for AIG, which has incurred $18 billion in losses over the past three quarters from soured mortgages. But the government has asked Goldman Sachs and JP Morgan Chase to lead a group of banks to offer up to $75 billion in credit for the troubled insurer.

AIG's survival, however, remains uncertain and that is not a good place to be for the markets and the dithering of the Fed on this one could cause further huge losses in the market.

"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.

The events of the last few days have been a huge shift in the power structure on Wall Street, echoing or sentiments of yesterday Justin Urquhart Stewart, investment director at 7 Investment Management in London said "It's a return to pure capitalism, the survival of the fittest—the government can't and won't bail everybody out,"

AIG has reached this position because of losses on its mortgage business which has now caused it rating to be dropped by at least two notches by the top three global ratings agencies.

Moody's Investors service cut AIG rating from A2 to Aa3 Standard & Poor’s rating service cut the rating from A-minus to AA-minus and Fitch Ratings reduced from A to AA-minus. These ratings are still 'investment grade' but for how long?

Once the world's largest insurer by market capital fell 61 percent and continues to fall in today's trading.

Market commentators opinions are that AIG should be bailed out as the consequences of letting it fail could be huge. Jim Cramer, CNBC commentator and former hedgie said ""I would radically have to change my view of where the market’s going if AIG fails, this one needs to be stopped. I don't know how to stop it. AIG is too big to fail."

The affect on the wider market of a failure of AIG are wide reaching. Kenneth Lewis, chief executive of BoA, said that "I don't know if a major bank that doesn't have some significant exposure to AIG". A collapse of AIG would "be a much bigger problem than most we've looked at." He added.

The health of AIG’s book of credit-default swaps (CDS), which are contracts sold to protect debt investors, are seriously in doubt. The ratings cuts technically trigger collateral calls from the debt investors who bought those swaps, because the likelihood of default on the swaps has increased and so the investors require more of a reward to hold on to them.

Unlike Freddie and Fannie, where rumors were rife that the bail-out would be a shoo-in, market sentiment around AIG is not so positive. The people that we have spoken to today believe that the talks taking place right now are crucial to the integrity of the financial markets and should AIG be allowed to fail, all bets are off.

This is an historic week in the markets. Having been in this industry for 20 years I have seen nothing like it, the opportunities for profit are massive, the opportunity for losses, equally as massive.

One thing is for sure, when the dust settles there will be some very, very rich traders who have played this market well, and some who are significantly poorer than they were.

We wish you the best of luck, be careful out there....

Source http://www.hf-markets.com/

No comments: