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AIG and the Lunacy of GAAP Reporting
What most folks looking at AIG are missing are:
1. Our financial system is quaking from the huge deleveraging happening because of the huge amounts of derivative securities tied to the mortgages/real estate industries as they themselves unwind. As this unfolds, all those gamblers who are on the hook will be penalized severely, and might disappear, because of the power of leverage, which cuts both ways with a 10x or 20x effect.
2. AIG does not simply hold long CDOs or CDS. They were 'insurers' and sold short CDS ie were the insuring party on a lot of credit default swaps tied to mortgages/real estate. So, their potential losses from this are unlimited and leveraged.
3. So, as hedge funds or whoever got their CDS, CDO insured by AIG gains on a leveraged basis due to house prices declining, AIG, MBIA etc will bear the losses on the other side of that zero-sum game. A 10% decline in house prices could potentially reflect itself in a 100% decline in shareholder equity amounts on which AIG, MBIA etc insured those 'credit derivatives' (CDO, CDS, ABS, CLO...)
4. Therefore, potentially these stocks have negative or zero future shareholder equity. If so, how can anyone place a multiple on the fair book value on an expected basis. Remember, trailing book value will look huge and you must not value these financials now on trailing P/B basis, but only on an expected P/B basis.
Aug 28 12:55 AM
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