Today's news accounts that AIG, the largest property and casualty insurer in the United States, may have "problems" with exposure to derivatives raises anew the question of what we DO NOT KNOW about the true state of financial company exposure to highly leveraged and ultra-high risk speculations which may be ready to explode, or which may have already exploded, but where the sound is being muffled by arcane balance sheet maneuvers.
As every financial market observer worth his salt can tell you, there is always a certain, rather sizable "bezzle" extant. Typically, these "bezzles" only come to light when a general financial panic and market sell-off force their revelation. These financial panics are somewhat akin to the water which buries 95% of a typical iceberg: when the waters recede (ie., when the financial meltdown occurs) the true dimensions and contours of the heretofore concealed iceberg are revealed in all their nakedness.
The euphemism popular among policymakers, central bankers, and other learned commentators and forecasters is: "repricing of risk." This expression actually conceals more than it reveals. It is not merely "risk" that is being "repriced": it is the spreading realization that things are not as they seem -- that "assets" are NOT assets as Webster defines them, but are rather DANGEROUS LIABILITIES. There is also the obfuscation of the very real issue: how do you "price," or "reprice" for the reality of a market which has, in the case of a number of financial "assets," all but disappeared? Here we have reference to residential mortgage-backed securities, leveraged loans, junk bonds, CDOs, CLOs, etc etc.
We doubt that the steep declines in bank and other financial stocks fully reflects the true state of these companies' balance sheets, that these declines accurately discount the virtual worthlessness of unsalable "assets," or the actual price likely to be realized in the current market environment were these "assets" to be placed for sale in any but severely limited quantity.
