Thursday, March 26, 2009

AIG: Bigger problem than bonuses

While I agree that the AIG bonuses shouldn't have been paid, the issue deserves less shouting and screaming than the fact that AIG still has $1.6 trillionof derivative contracts outstanding, as reported in a CNN Money article.

AIG is not going to be able to back up all of these contracts if they need to be paid out. The firm is attempting to extinguish the contracts through negotiation with counterparties. Should AIG have to liquidate, the losses incurred by many of the counterparties could lead to a large number of them being insolvent.

The American public should be more worried about AIG's outstanding liability - every U.S. taxpayer is on the hook for the consequences.

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