WASHINGTON–AIG's potential losses from its investment in derivatives of subprime loans could range from not material to a total write-off of 2007's fourth-quarter earnings, a Citigroup analyst said today in a note to investors.

AIG issued a statement saying it doesn't think the potential losses from the derivative securities “will be material.”

The company's comments were made in the wake of AIG's disclosure Monday that PricewaterhouseCoopers, its auditors, have suggested a lack of oversight at AIG has led to a material weakness in financial controls that render the company unable to reliably quantify the market value that underlies financial guarantees related to subprime investments.

But Standard & Poor's announced today it had revised its outlook on the parent company and its core operating subsidiary to negative from stable. S&P did affirm its “double-A” counterparty credit ratings on the parent company and the “double-A-plus” counterparty credit and financial strength ratings on AIG's core subsidiaries.

At the same time, Fitch Ratings placed the ratings of AIG Finance Hong Kong Ltd. on rating watch with a negative outlook. That followed Fitch's decision Monday to place the AIG holding company's ratings and certain finance company subsidiary ratings on rating watch with a negative outlook.

Also taking action was Moody's Investors Service, which changed the rating outlook for AIG senior unsecured debt rated “Aa2″ to negative from stable, “based on the company's sizable exposure to the US subprime mortgage market.”

The Citi note to investors by analyst Joshua Shanker explained that projecting the potential consequences of AIG's so-called “super senior default swap portfolio involves looking into a box so dark it is difficult to see in or out.”

In its statement today, AIG said it continues to believe that the mark-to-market unrealized losses on the super senior credit default swap portfolio of AIG Financial Products Corp. “are not indicative of the losses AIGFP may realize over time.”

Based upon its most current analyses, AIG said it believes that any losses AIGFP may realize over time as a result of meeting its obligations “under these derivatives will not be material to AIG.”

Mr. Shanker quantifies AIG's comments as saying that AIG's “worst-case scenario” will be where it writes off all “triple-B”-rated and lower second half of 2005 subprime collateral, all 2006 and 2007 subprime, and all collateralized debt obligations (CDOs) rated “A” or lower, and only suffers a $600 million loss.

But Mr. Shanker said the numbers could be much bigger. He said that AIG said the portfolio observed a mark-to-market loss of $1.6 billion as of Nov. 30, 2007. “That number could be as high as $6 billion, compounded by any further deterioration observed in the past 11-12 weeks,” Mr. Shanker said.

Citi, he said, is assuming a $5 billion loss in capital markets, which brings its fourth quarter of 2007 estimated earnings per share to zero.

“While we expect to revise our price target when AIG reports earnings, the lack of transparency makes such a change largely arbitrary at this time,” Mr. Shanker said.

Billionaire investor Warren Buffet in a comment to CNBC yesterday, regarding the financial disclosure by AIG, said it was “very, very, very tough to evaluate a lot of these securities. You know sometime back I called them, derivatives, 'weapons of mass destruction.' I probably should have called them 'weapons of selected destruction,' but it's been pretty massive in some cases.”

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