Posted on 18 Feb 2010
AIG has shelved plans to sell the whole of its derivatives portfolio, which nearly destroyed the insurer in 2008. It believes that keeping up to $500 billion worth of complex positions could help it to survive as an independent entity and repay US taxpayers.
The decision underlines the management's confidence in AIG’s future but could prove controversial in Washington, where officials have baulked at the cost of the US government bail-out of the insurer and scrutinized its use of derivatives.
Gerry Pasciucco, who joined AIG after it was rescued by the government in September 2008 to wind down AIG Financial Products, said the troubled unit would still be out of business by the end of this year. AIGFP caused a storm in Congress last year with plans to pay some of its 200-plus staff large bonuses.
The original plan, devised by then chief executive Edward Liddy and the government after the rescue, was to sell off all the positions and close down AIGFP as soon as possible. But Mr Pasciucco said that derivatives with a notional value of between $300bn and $500bn – or between 15 and 25 per cent of the derivatives portfolio’s original size – would not be sold. The assets could either be managed by AIG or outsourced to an external fund manager, he added.
AIG’s management, led by chief executive Robert Benmosche, believes that such a move reduce the need for fire sales and enable AIG to reap the benefits of rallying credit markets, Mr Pasciucco said. AIG recorded billions of dollars in paper profits on its derivatives in the third quarter of 2009.
AIG, which is majority-owned by the US authorities, has sold derivatives – and reduced the risk attached to them – since the bail-out. Its derivatives book, which had a notional value of $2,000bn in September 2008, stood at $940bn at the end of December 2009, the insurer is expected to announce with its fourth quarter results.
Mr Pasciucco said his team would continue to reduce the size and the risk of the portfolio until it reaches $300bn-$500bn. The number of derivatives positions has fallen from 44,000 in late 2008 to 16,100 at the end of December while the “gross vega” – a measure of risk – in the portfolio has gone from $1.3bn to $310m
AIG executives said the Treasury and the New York Federal Reserve, which took an 80 per cent stake in the insurer in return for more than $80bn in federal funds, had been consulted on the decision to keep the derivatives. Peter Hancock, the derivatives expert who has just been hired to oversee AIGFP, among other responsibilities, is also believed to back the move.