What more can I say? The chaos continues. AIG is the area of biggest focus in the credit market, given the gigantic size of its portfolio and the risks it is facing. FromBloomberg:
“American International Group Inc.’s ratings cut drove the cost of default protection on Wall Street banks to a recordon speculation the insurer needs more cash to back $441 billion of creditderivatives.
“AIG may have to post as much as $17 billion in collateral after the company was downgraded yesterday, UBS AG analystssaid. The biggest U.S. insurer by assets is seeking as much as $75 billion in loans arranged by Goldman Sachs GroupInc. and JPMorgan Chase & Co. after posting $18 billion in losses over the past three quarters, according to twopeople familiar with the situation.
“If AIG goes under, there could be a domino effect,” said Andrea Cicione, a creditstrategist at BNP Paribas SA in London. “AIG is very connected to the financial system and it is very connected to thereal economy.”
“Credit-default swaps on the Markit CDX North America Investment Grade Index jumped 25basis points to a record 220, according to Phoenix Partners Group prices at 7:50 a.m. in New York.
“Sellers of protection on AIG demanded a record 49 percent upfront and 5 percent a year, according to Phoenix. That’sup from 33 percent yesterday and means it costs $4.9 million in advance and $500,000 a year to protect $10 million inbonds for five years.
“Credit-default swaps, contracts conceived to protect bondholders against default, paythe buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhereto its debt agreements. A rise indicates a deterioration in the perception of creditquality; a decline signals the opposite.”
Meanwhile, the U.S. Fed and other global central banks are injecting tens of billions of dollars in liquidity intotheir respective financial systems. Again from Bloomberg:
“The Federal Reserve added $50 billion in temporary reserves to the banking system when it arranged overnightrepurchase agreements, or repos.
“The rate for overnight loans between banks had opened at 3.75 percent, above the Federal Reserve’s targetrate, asAmerican International Group Inc.’s credit rating cut increased banks’ reluctance tolend. The rate dropped to the central bank’s target of 2 percent after the cash injection.
“The Fed added $70 billion in reserves to the banking system yesterday, the most since the September 2001 terroristattacks, to bring borrowing costs down after the bankruptcy of Leman Brothers Holdings Inc. triggered a hoarding ofcash. Funds opened at 3.5 percent yesterday.”
Speaking of the Fed, policymakers meet today. Given all the carnage out there, they could decide to cut interest rates– in fact, a 25-basis point cut is currently all-but-priced in (in the futures market), with the possibility of a50-point cut rising. The federal funds rate target is currently 2%, and has been there since late April.
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