AIG to Honor ETC Debt

AIG (AIG), once a giant insurance and financial services conglomerate hit hard by the ongoing global credit crisis, is reportedly saying it will honor all of its financial obligations for ETF Securities' exchange-traded commodities.

And to prevent future problems like the ones that rattled ETF Securities' ETC lineup during AIG's financial crisis, the asset manager is believed to be exploring new collateral agreements for its portfolios, according to reports.

Third-party credit risk became an issue for ETF Securities in the market meltdown. Commodities portfolios where contracts were backed by AIG as counterparty opened the portfolios to credit risk of the insurer and forced the company to suspend ETC trading, on Sept. 16, when it looked as if AIG might go bankrupt (see story.)

However, with AIG bailed out by the U.S. government, ETF Securities has over the past two weeks restarted trading on all of its commodities portfolios on the London Stock Exchange.

The issue going forward for ETF Securities is to insulate itself from a repeat situation in which credit risk from a counterparty cripples its ability to trade its ETCs.

The company is reportedly in talks with market makers about the kind of collateral structure that would mitigate credit risk to portfolios, and this could include restructuring the existing ETCs.

Negotiations with AIG are said to be focused on an obligation for the ETF company to provide collateral to support 100% of the aggregate prices of all the commodity contracts provided by AIG.

Comments

[michange:]

Here is the question that's keeping me awake at night :


Given that US authorities will probably be responsible for both execution of all AIG CDS (through the takeover of AIG), and (de)valuation of most CDOs (through the TARP aka. "Paulson Plan"), what is the most interesting option in the following :

1° TARP at low CDO value
(entails : low TARP costs but high CDS default premium for the State, weaker banks)

2° TARP at high CDO value
(entails : high TARP costs but low CDS default premium for the State, stronger banks)

3° TARP at original CDO value
(entails : highest TARP costs but no CDS default premium for the State, healthiest banks)


In an otherwise sane banking world, I'd say solution 3 makes the most sense, but...


Also, what will happen with the 300bn in CDS bought by European banks(*)(**) from AIG as guarantee on the numerous CDOs they bought on WallStreet?

In particular, what happens to the smaller banks that definitely have CDOs and CDS but have not access to the Paulson Plan? One imagines (***)they immediately will go bankrupt and be takebn over by UBS, DB, Lloyd, Santander and the like.

This hypothesis leads to a new specific consequence of the TARP : a massive conslidation of deposit banks in Europe, trigerred by US authorities...

(*) référence Financial Times Alphaville :
ftalphaville.ft.com/bl...
(**) référence Fortune :
money.cnn.com/2008/09/.../
(***) référence Economist:
www.economist.com/fina...

see also :
www.lacrisepourlesnuls...
lacrisepourlesnuls.blo...

2008 Oct 01 09:54 PM

[searcher:]

Yes, we are already seeing the Euopean consolidation. "Massive" is problematical.

2008 Oct 02 11:13 AM