Upset over the bonus boondoggle, two Paris-based AIG executives quit... and their departure could cause $234 billion in derivatives to default. The two execs at Banque AIG, Mauro Gabriele and James Shephard, agreed to stay on for the transition. But AIG must replace them "to the satisfaction of French banking regulators."

If they don't, French regulators could appoint someone to take the position, "an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes."

If these derivatives did default, the government would likely funnel billions more dollars into AIG. And the banks on the other end of the contracts could be forced to raise billions more in reserves to protect from potential losses.

Read full article...