Posted On: December 11, 2008, 12:59 pm CST

Posted By: Peter Polstein

Come on folks, let's get real. I called publicly the "demise" of AIG in articles back in the fall of 2007. All you had to know was the amount of liabilities being built by the UK operation and Bermuda where collateral was the so called "good name" of AIG. Agt this juncture, no one has an accurate handle on the ultimate potential for these instruments, but looking at their latest financial data, it certainly is excess of some $ 350 billion.

While there are some who espouse the theory that the insurance operations are both safe and have sufficient reserves to handle losses, one of the problems that AIG will face in the sale of assets, has been their "interesting" reserving practices of the years, which will bare real actuarial scrutiny when the times comes.

At the rate they are going, it appears difficult, if not impossible to repay the so called "bailout"irrespective of what assets are sold. To continue the rhetoric that their core business is not for sale, falls into the line of fantasy. Even on the assumption that their core business does come to the sales block, their are many who do not have an appetite for that which has been underwritten, then, their is the philosophy of those in management which will be alien to a potential acquiring insurer, and lastly, reserving practices.

The practice of attempting to out underwrite your losses, has never physically borne fruit, and it does become a desperate measure, irrespective of those who would say otherwise.

The loss of both Kelly's at Lexington is a huge hit on the AIG base, let no one believe otherwise, and is endemic of what is occurring within that community.

It is still conceivable that AIG could go down, and the so called "core business" go into runoff. The worst case scenario has yet to play out, and it will be interesting to see their losses not only in this upcoming 4th Q, but the first two of 2009. These mark to market potential losses have yet to fully mature, and unless this Government is willing to back this group to the tune of over $ 400 billion, there is reason to be concerned for their ability to survive with capital adequacy.

As to Liberty, right, keep your mouth shut, as well as the vast majority of those within the industry, all of whom have been caught up in the same five letter word and are paying the price.

GREED.