--Irene Chapple & Kelly Paul
Market participants expect a slow unwind of American International Group’s giant credit derivatives portfolio after the insurer was flung a USD85 billion lifeline by the U.S. Federal Reserve.
Analysts and traders, still mulling the implications of the bailout, said credit derivative counterparties will likely ride out their contracts but are unlikely to renew their business. AIG is a major counterparty in the CDS market.
The bailout is not considered a credit event so a fire sale of derivatives has been avoided. One analyst said it was possible—but not common--to take protection on a CDS in the form of an option. Counterparties could also pay their way out of contracts. However, a likely scenario is for the counterparties to ride out the contracts then look to alternative insurers.
