AIG's Commercial Real Estate Losses Mount

Tucked deep within the details of AIG's $62B quarterly loss was a $5B write down on the value of the Company's commercial mortgage back securities portfolio(CMBS). AIG's vast losses that are attributable to credit default swaps, and the fact that it still has a net notional CDS exposure of ~$300B, mean that sometimes losses at the Company's other business segments are overshadowed. We have made our views on AIG quite clear, and so we point out the Company's CMBS losses not to lament the fall of AIG, but rather to speculate on the effect of this write-down on the rest of the banking industry.

Having been diminished to a "Ward of the State"-like status, we presume that AIG lacks the motivation to view its CMBS portfolio through a set of rose-colored lenses. The same can not be said for other financial institutions who, fearing even more Draconoian caps on compensation and executive perks, would very much like to avoid any sort of nationalization. Now, AIG values its CMBS portfolio, as of the end of 4Q '08, at $14.2B. Roughly 22% of the securities are of the 2007 vintage, and 64% of the total portfolio is either Office or Retail. Our point being, the characteristics of AIG's CMBS portfolio are very similar to a multitude of other market players, where 2007 marked the mountain top of total CMBS securitization, with a strong bias towards Office and Retail. It should be interesting to monitor the ongoing valuations that major financial institutions place on their CMBS holdings, especially in light of AIG's recent precedent, and the continued deterioration of that market.

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