AIG Downgraded After Posting Wrenching Losses

AIG posted a first-quarter loss of $7.8 billion, due mostly to a write-down of $9.11 billion in credit default swap contracts tied to fixed income mortgage securities. The insurer has written credit default swap contracts on over $500 billion of securities, about $60.6 billion tied to subprime mortgages. CEO Martin Sullivan predicted as recently as March that losses in the derivatives book were temporary and the worst-case scenario of actual losses taken may be only $900 million over a period of years. Yesterday, the company raised that amount to $2.4 billion. If Sullivan's actual loss estimates continue to triple every month, the company will be in a world of hurt before the end of the year. AIG will begin a capital raising extravaganza by offering $7.5 billion in stock, debt and equity units today followed by an additional $5 billion in hybrid securities at a later date. Both Fitch and S&P lowered AIG's debt ratings one notch after the miserable earnings report. While Sullivan claimed that he was "surprised" by the magnitude of the losses, he chose not to declare the popular refrain of "the worst is behind us." That alone should cause serious concern for investors contemplating investing in the new stock offering.