AIG: What's Another $5.36 Billion?

AIG reported a loss of $5.36 billion, or $2.06 a share in the second quarter, significantly worse than average analysts estimates.  Why the analysts had this one so wrong is anybody's guess.  It is widely known, and has been reported several times here at Mock The Market, that AIG has a monstrous portfolio of credit default swaps.  As of the end of June, AIG guaranteed $441 billion of assets, $57.8 billion tied to subprime, down from $469.5 billion and $60.6 billion respectively as of March 31.  Note that the subprime number has barely declined, indicating that the company is trying to dispose of the most liquid assets first, hardly a good sign.  If you are an analyst following this stock and aren't keeping track of what is going on in the credit default swap market, you are not very good at your job.  Frankly, I don't care how good the insurance business is, until AIG figures out a way to mitigate the risk in its derivatives portfolio, the company will continue to post losses until the credit markets return to normal.  First, find the bottom in housing, then find the turning point in credit, then put out a rosy report on the company's prospects.  Hear that, Mr UBS analyst who thought this was a "buy" two days before this disastrous earnings report?

AIG wrote down the value of credit-default swaps by $5.56 billion in the second quarter.  Even more disconcerting, the company has had to post $16.5 billion of collateral as of July 31st and said it is unable to determine the effect "that recent transactions involving sales of large portfolios of CDOs will have on collateral posting requirements."  What does that statement mean to me?  The company has no idea how much more money it will need to raise.  In the "yet even more disconcerting" department, AIG raised its estimate for how much it will have to pay on its swaps, from $2.4 billion to $8.5 billion.  AIG also marked down the value of investments by $6.08 billion after "severe rapid" drops in the value of securities backed by home loans.  The good news is that excluding the declines in the value of some investments, AIG only lost $1.32 billion!  What a relief!  The company only lost $1 billion in its core operations.  I smell another 330 point rally in the Dow.