The very circular nature of AIG’s profits

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So AIG made a $1.82 billion profit in the second-quarter—its first venture out of the red since 2007. Hmmm, it’ll only take 47 more quarters like that for the company to repay the $87.6 billion in direct aid it’s gotten from the federal government.

I’m no insurance industry analyst, but a brief look at the financials the company released today makes clear why it swung to profit. It’s because financial markets recovered, meaning that a lot of the credit derivatives and other financial instruments AIG had spent the last six quarters writing down in value now got to be written up. Market value changes in AIG Financial Products’ infamous portfolio of super-senior credit default swaps (what are those? go read Gillian Tett’s Fool’s Gold and you can halfway understand like I do) went from bringing $5.6 billion in losses in the first quarter to delivering $636 million in gains in the second.

Now AIG is a financial company, so it shouldn’t be surprising that market shifts affect its earnings. But there’s something awfully circular about markets seemingly being buoyed by a positive earnings report that was itself almost entirely the product of buoyant markets. Of course, the same thing was true in the other direction last fall. Financial markets are, like, totally weird.