Saturday, March 01, 2008

$10 Billion Gaap between model and market

David Gaffen of the WSJ MarketBeat blog explains as how that $1 billion dollar loss earlier announced by AIG is not as bad as announced.

No sir, it's eleven times worse. It's "an $11 billion write-down in derivatives exposure to subprime debt that was originally estimated at a $1 billion loss".

The losses are related to the company’s exposure to what’s known as the “super senior” tranches of subprime debt.

The company says these losses are “not material”.

Because the losses may not materialize, — the mark-downs reflect expectations of default, not actual defaults — Morgan Stanley analysts say this should reverse, and they estimate perhaps a $900 million eventual actual loss, rather than the $11.25 billion “cumulative unrealized mark-to-market valuation losses embedded in the GAAP results recorded thus far.”

Guambat's broker calls that a "margin call", and it feels pretty material to Guambat.

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