Monday, September 15, 2008

AIG Is Tuesday's Headline

So what could be worse after today?

S&P and Moody's have just downgraded AIG. Suddenly they need $75 billion in order to meet collateral calls.

A collateral call is a little like a margin call. When you can potentially owe money on a security, the other party demands that money be held in escrow "just in case". AIG has written several securities that promise to put up collateral in the case of downgrade by major ratings agencies.

I believe the words used on CNBC is a "Financial Atomic Bomb". As CNBC is known for a perpetually sunny outlook on the stock market, things might be rough tomorrow.

If you want to keep track what this does to S&P futures overnight, click here.

Update via CR: NYT is reporting that
But none of those downgrades appeared to lead to events requiring A.I.G. to post billions of dollars of collateral to its swap counterparties. Its swap contracts cite downgrades by Moody’s and Standard & Poor’s of A.I.G.’s long-term senior debt ratings, and such changes had not been announced as of Monday evening.
So the downgrades are not forcing the collateral after all. CNBC says that bankruptcy will happen by tomorrow if not resolved.

This is obviously a developing situation.

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