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

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

The company's comments were made in the wake of AIG's disclosureMonday that PricewaterhouseCoopers, its auditors, have suggested alack of oversight at AIG has led to a material weakness infinancial controls that render the company unable to reliablyquantify the market value that underlies financial guaranteesrelated to subprime investments.

But Standard & Poor's announced today it had revised itsoutlook on the parent company and its core operating subsidiary tonegative 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 ratingson AIG's core subsidiaries.

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

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

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

In its statement today, AIG said it continues to believe thatthe mark-to-market unrealized losses on the super senior creditdefault swap portfolio of AIG Financial Products Corp. “are notindicative of the losses AIGFP may realize over time.”

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

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 millionloss.

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

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

Billionaire investor Warren Buffet in a comment to CNBCyesterday, regarding the financial disclosure by AIG, said it was“very, very, very tough to evaluate a lot of these securities. Youknow sometime back I called them, derivatives, 'weapons of massdestruction.' I probably should have called them 'weapons ofselected destruction,' but it's been pretty massive in somecases.”