AIG Takes Hit on Subprime Accounting Woes

AIG, a component of the Dow Jones Industrial Average, joins other prominent names in admitting it can't figure out how to value some of its assets tied to home loans made to the riskiest borrowers. According to documents filed with the Securities and Exchange Commission on Monday, the New York-based insurance giant now puts the gross cumulative decline in value of its credit-derivatives portfolio at $4.88 billion. Earlier, management projected the decline to be between $1.05 billion and $1.15 billion. Accountants are still trying to refine their methods for crunching December's numbers.

AIG's complex portfolio holds credit default swaps, some of which involve collateralized debt obligations, or CDOs. Some CDOs are backed by mortgages including those made to subprime borrowers.

The company also warned that its independent auditor, PricewaterhouseCoopers, has found "material weakness" in how AIG determines the value of its credit-derivatives portfolio. Ratings agency Fitch announced Monday it was putting the insurer's rating on "negative" credit watch.

"They say they have not determined the entire rate of decline of fair value for the portfolio," he says. "And this news has been far more negative. They'll have to do this for December, too. This one has been far more negative."

So while Monday's revised loss disclosure won't be the last piece of subprime-linked bad news, it's almost certainly the most severe drop for AIG, Devlin says.

Friedman Billings Ramsey analyst Bijan Mozami added while the damage isn't over, it won't be so crippling that investors should disregard the stock.