Transcripts

AIG Struggles To Survive

PAUL KANGAS: A wild ride for shareholders of AIG, the stock seesawed all day on rumors running rampant on Wall Street that it was, or was not being bailed out by private funding or the federal government. None of those things happened today, and after the closing bell, the insurance giant said it has enough money to stay in business and pay claims to policyholders. Stephanie Dhue has more on the troubles at AIG.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Does AIG have the strength to be there? To answer that, it helps to know a little bit about credit default swaps. Credit default swaps, or CDS, are insurance-like contracts that promise to cover losses in the event of a default. The insurance giant holds $527 billion in its credit swap default portfolio, including credit protection on losses in mortgage-backed securities. Standard & Poor's credit analyst Rodney Clark says his firm downgraded AIG overnight to A-minus, because increasing home foreclosures will likely lead to greater losses in that market.

RODNEY CLARK, CREDIT ANALYST, STANDARD & POOR'S: We see the potential for increasing losses on those securities, which means AIG and other companies like them that have offered this credit protection through swaps is increasingly on the hook for losses on these securities.

DHUE: That ratings downgrade means AIG will have to raise an additional $13 billion to cover potential losses, on top of $20 billion it already needed. The downgrade also triggers the rights of contract holders to ask for more money to cover their risk. Micah Green used to head the Bond Market Association and is now an attorney with Patton Boggs. He says the risk doesn't end with AIG.

MICAH GREEN, PARTNER, PATTON BOGGS: The ripple effect then goes from there to every one of their investors and every one of their counterparties, and that's where the systemic risk is. It's a very big pebble in a very rocky sea that can only get rockier if there were a failure.

DHUE: The $62 trillion CDS market is what is called a bilateral market, where trades are done between two parties. Unlike the NYSE or the NASDAQ, there's no exchange, no settlement or clearing system. Analyst Karen Petrou says that makes it difficult for the parties to settle their obligations.

KAREN PETROU, MANAGING PARTNER, FEDERAL FINANCIAL ANALYTICS: The CDS market is like a lot of people on two ends of the telephone call, but none of them can find each other, because there's no exchange. We're all picking up our phones in the CDS market, but we have no idea who is on the other end.

DHUE: But that chaos could have a silver lining: Delays in settling the claims could buy firms like AIG the time to sell assets to cover their losses. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.