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AIG Back to Wagering on Subprime Mortgages

American International Group Inc. (AIG), which the U.S. government had to provide with $182.3 billion in rescue funds in 2008 because of failed mortgage investments, believes that it is time to reenter the market
May 22, 2012

American International Group Inc. (AIG), which the U.S. government had to provide with $182.3 billion in rescue funds in 2008 because of failed mortgage investments, believes that it is time to reenter the market.

Regulatory filings show that Robert Benmosche, AIG’s CEO, increased AIG’s holdings of securities backed by residential mortgages not guaranteed by the government and commercial mortgages to $28.4 billion at the end of March, compared with the $11.1 billion held by AIG in 2010. AIG is also expanding its business of insuring home loans with low down payments. The company has decided that it is time to return to the type of investments that required the government to intervene when the company was unable to meet margin calls to banks. Property values have declined more than 35 percent since 2008, and the securities are now less expensive and there are fewer competitors in the market.

Pressure to generate profit from bonds held to back claims has increased as the company’s property-casualty insurer Chartis posted underwriting losses in 2010, 2011 and for the first quarter of this year, meaning the business spent more on claims and expenses than it earned in premiums. Chartis is AIG’s largest unit.

While AIG is moving out of traditional investment- grade bonds for yield, they’re not taking so much risk they’ll “blow themselves up again,” said Rob Haines, an analyst at debt research firm CreditSights Inc. in New York. Josh Stirling, an analyst with Sanford C. Bernstein & Co. observed that AIG’s investing “obviously doesn’t make any sense if the world relapses and there’s a massive recession and unemployment goes to 30 percent.”

Read more on AIG jump back into mortgage investments: AIG Wagers on Subprime, Betting Second Time Is Different (Bloomberg 5/16/12)