Sunday, October 19, 2008

AIG's Dangerous Collapse

Daniel R. Amerman, CFA: While it may look superficially similar to the recent implosions of such investment giants as Fannie Mae, Freddie Mac and Lehman, the takeover and bailout of AIG is quite different, and means that the market is entering the next and even more dangerous phase.What is driving the fall of AIG — and potential government losses that may far, far exceed the $85 billion bailout announced late September 16th — is not mortgages or real estate (directly), but fears that AIG's huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.