The AIG Blackhole

News of a $60 billion fourth quarter loss at AIG and that they are in talks with the Treasury about alternatives.  This after a $24.5 billion loss in the third quarter. 

AIG in talks with U.S. government, sees $60 billion loss: source

The talks with the government include the possibility of additional funds for the insurer and trading debt for equity, another source said.

The situation is fluid, and other options are being discussed, the source said, adding that it was unclear where the talks would lead.

CNBC, which first reported the development, said the losses to be reported Monday were due to writedowns on commercial real estate and other assets. It said the insurer's board will meet next Sunday to work out an agreement with the government.

Hopefully the government does not throw more good money after $150 billion of bad money.

AIG Seeks More US Funds As Record Loss Looms

Talks between the government and AIG are focussed on how the company can swap some of the debt held by the government for equity in AIG.

The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.

AIG has borrowed roughly $40 billion from a $60 billion credit facility provided it by the Federal Reserve Bank of New York. if it can find a way to pay that down by swapping equity, it hopes to take it back up to a level that will allow it to meet its collateral and capital calls.

AIG's board is scheduled to meet this Sunday night in hopes of hammering out an agreement with the government. But in case it can't, AIG's lawyers at Weill Gotschal are preparing for the possibility of bankruptcy.

Hindsight serves to say that bankruptcy is the only option here.