By Lilla Zuill
NEW YORK (Reuters) - American International Group Inc
The problem underscores the minefield that AIG has to navigate in trying to stop the heavy financial bleeding it has sustained from bets it took on mortgage debt before the U.S. housing market collapsed.
AIG spokesman Nicholas Ashooh said unwinding the $9.7 billion in derivatives trades is not as straightforward as unwinding others in the same portfolio because there is no underlying mortgage or corporate debt that can be bought.
"It does need a different approach, but we are still addressing all of our financial issues with the package from the Federal Reserve, and we still have capacity under the federal loan," said Ashooh.
Under the government's rescue of AIG, which swelled to more than $150 billion last month, a fund was established to buy the debt underlying credit default swaps, or CDS, written by AIG. CDS are contracts that insure against default by a debt issuer.
But banks and other firms bought $9.7 billion of credit default protection from AIG without owning the underlying debt, meaning they have no assets to sell to the fund.
As of last month, the fund had contracted to buy $53.5 billion in toxic mortgage debt.
By buying the debt, AIG would be able to tear up its guarantees, eliminating any future payments on these contracts.
The insurer, once the world's biggest by market value, has posted losses of $42.5 billion over the past four quarters, largely because of collateral it had to post for its CDS portfolio.
Ashooh said the $9.7 billion worth of contracts may be addressed through the government-backed fund, called Maiden Lane III. These trades are not expected to be a cash drain for AIG in the same way that other contracts linked to mortgage debt have been, he said. Two-thirds of the synthetic contracts do not carry collateral requirements.
He added that these contracts are a slice of AIG's multi-sector $71.6 billion CDS portfolio, and that no new losses have been incurred. Details were disclosed in a quarterly filing with the U.S. Securities and Exchange Commission last month
"They have always been part of the portfolio," he said.
(Reporting by Lilla Zuill; editing by John Wallace)
