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AIG, Goldman Unwind Soured Trades

Source: WSJ

Posted on 12 Apr 2010

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The derivatives unit of American International Group Inc. has unwound most of its soured mortgage trades with Goldman Sachs Group Inc. still left after the insurer was bailed out by the U.S. government in 2008, according to people familiar with the matter.

The move by AIG Financial Products to terminate credit-default swaps insuring about $3 billion of mortgage-asset pools arranged by Goldman caused AIG to realize a $1.5 billion to $2 billion loss last year, the people said. But the insurer is no longer exposed to declines in the value of these asset pools, called "Abacus," which could have forced AIG to make payouts upon defaults or triggered a costly collateral call.

Reducing the risk of AIGFP's derivatives portfolio is a crucial part of efforts to stabilize AIG following its near-collapse and enormous government bailout, which came after AIG had to hand over tens of billions of dollars in cash collateral to banks that entered into credit-default swaps with the insurer. Credit-default swaps are insurance-like contracts used to wager on the performance of bonds or to protect against their default.