By Lilla Zuill
NEW YORK (Reuters) - American International Group Inc
The problem underscores the minefield AIG is navigating in trying to stop the heavy losses sustained from bets it made on mortgage debt before the U.S. housing market collapsed.
The company's shares were down 22 cents to $1.71 in Wednesday afternoon trade on the New York Stock Exchange.
AIG spokesman Nicholas Ashooh said on Wednesday unwinding the $9.8 billion in derivatives trades is not as straightforward as unwinding others.
With credit default swaps, AIG agreed to protect debt for banks and other parties in deals that forced the insurer to post large amounts of collateral and ultimately seek government help.
Under the government rescue package that swelled to more than $150 billion last month, many of those derivatives transactions can be canceled because a government fund is buying the debt that AIG had guaranteed for banks and other parties.
But with the portfolio in question, the parties that bought the credit protection do not own the actual collateralized debt obligations (CDOs), making the deals harder to unwind than other transactions.
"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.
As of last month, the U.S. fund had contracted to buy $53.5 billion in toxic mortgage debt from parties that traded with AIG.
There are options for unwinding the contracts, said Donn Vickrey, an analyst at research firm Gradient Analytics. "If there is no specific asset to buy, there is no reason why you could not set up something analogous," he said, suggesting that AIG and the federal government could instead purchase an instrument written on an index rather than buy an individual CDO.
"It seems to me for the government it could be better as it would be more diversified than holding an individual security that you know to have underperformed," added Vickrey.
AIG, once the world's biggest insurer 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 a government-backed fund called Maiden Lane III. The contracts are not expected to be a cash drain for AIG in the same way that others linked to mortgage debt have been, he said. Two-thirds of the contracts do not carry collateral requirements.
He added that the contracts are a slice of AIG's multisector $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.
Through Tuesday's close, AIG shares had fallen 97 percent this year. The government rescue left taxpayers holding about 80 percent of the company's shares.
(Reporting by Lilla Zuill; editing by John Wallace/Jeffrey Benkoe)