Investment News

AIG, the world's largest insurer, posted a net overall $5.36 billion loss for the second quarter of 2008. That's billion with a "B," five of them, all gone in one three month period. The cause is the mortgage-backed securities mess. In the second quarter report filing, AIG Chairman and Chief Executive Officer Robert B. Willumstad said, "Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment."

The loss represents 1/3 of all the general insurance net premiums written for the quarter by AIG. Their financial report says, "Capital Markets reported a $6.24 billion operating loss in the second quarter of 2008, due to $5.56 billion of unrealized market valuation losses related to AIGFP's super senior credit default swap portfolio and a $518 million credit valuation loss. In addition AIGFP experienced low transaction volumes due to challenging market conditions."

The report also notes, " A conference call for the investment community will be held Thursday, August 7, 2008 at 8:30 a.m. EDT. The call will be broadcast live on the Internet at www.aigwebcast.com. A replay will be archived at the same URL through Thursday, August 21, 2008."

This is undoubtedly the next stage in an overall market unraveling. The lending markets affect many other industries, and insurance is certainly one of those industries. We will very likely be seeing more reports like this in the days and weeks ahead.

The question remains...how far does all this go? Some would argue that we're seeing a major unraveling of the dollar and financial markets, but most see this only as a bump in the road, albeit a major one, and that things will eventually improve.

Of course, lurking in the background is the Federal Reserve Board of Governors. Many believe that they will play the most important role of all, depending on how they handle the discount lending rate over the weeks and months ahead. This is certainly true to an extent, since it is largely Fed policies combined with Federal housing laws aimed at providing cheap and easy mortgages to higher risk borrowers toward the goal of making homeownership available to everyone which is the root cause of the whole situation. Sadly, this gets virtually no play in the press and no recognition by political leaders in Washington.