Repeating a pattern of larger than previously announced writeoffs prevalent in the entire financial sector, AIG to Absorb $5 Billion Loss on Securities Lending.

American International Group Inc. plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse during the past year.

The world’s largest insurer will assume as much as $5 billion of any losses on sales of the investments, up from a previous commitment of $500 million, said Christopher Swift, vice president for life and retirement services, in an interview. AIG also will inject an undisclosed amount of capital into some of the subsidiaries, he said.

State regulators in Texas said they didn’t know AIG was investing cash collateral from the securities-lending business in subprime-linked assets and were concerned the insurance units hadn’t put aside enough capital to cover potential losses.

State regulatory filings show that AIG’s securities-lending unit used almost two thirds of its $78 billion in cash collateral to buy mortgage-backed securities that plunged in value starting last July as subprime defaults climbed. Most of the securities were rated AAA or AA. The market value of the collateral pool, including cash and securities, fell to $64.3 billion as of March 31.

In addition to the $9 billion in unrealized losses, AIG and its 12 insurance and annuity units that participated in the securities-lending pool incurred $3.9 billion of realized losses, or declines the company no longer classifies as temporary. These losses reduced AIG’s earnings, primarily in the fourth quarter of 2007 and the first quarter of 2008.

Bigger writedowns At Merrill Lynch

MarketWatch is reporting Bigger write-downs seen at Merrill.

Merrill Lynch & Co. (MER) could write down as much as $5.4 billion on distressed assets in the second quarter, an analyst for Lehman Brothers Holdings said Friday, the second day banking analysts have taken aim at the firm’s estimated second quarter results.

“We did a deeper review of Merrill’s (MER) monoline exposures on asset-backed security and collateralized debt obligation assets which had not previously been highlighted,” Lehman (LEH) analyst Roger Freeman wrote in a note to investors. “This incremental $1.7 billion of write-downs constitutes the majority of our adjustment.”

“We believe that Street estimates will come down as the Street adjusts for the significant impact of these monoline credit valuation adjustments in addition to the more common set of inventory marks,” Freeman said.

Pattern Will Continue

This pattern will continue for quite some time. Everyone is underestimating the effect that rapidly rising unemployment will have on credit card defaults, Pay Option ARM (liar loan) defaults, home equity loan defaults, and commercial real estate losses.

Mike “Mish” Shedlock
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