Mortgages Uncovered

Bank of America’s chief executive, Mr Ken Lewis said

“I don’t know of a major bank that doesn’t have some significant exposure to AIG.

The share prices of many banks have dropped due to the sudden shock that sent waves though the global markets, that AIG are now in a position where they need to raise literally billions in new capital to shore it back up.

So how has it exposed our banks?

Well, Sandy Chen of Panmure Gordon has shed some light on some insightful he has made and the following is part of the AIG United States regulatory filing:

“Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP’s super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position.”