Plus, industrial companies have become less important to the stock market, Dow Jones said.
Schadenfreude
Dow Jones said it will make mathematical changes to the way it computes the value of the index before Feb. 19 so that the change in components will not affect the index's level.
AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential
Since my I've yet to earn my Uberdegree, I may misunderstand this sentence. But to me it seems to say, "We can't tell if we lost 30 percent or 40%, so we'll call it 0%."
Could someone please clarify this a bit for me? It sounds like AIG should have a handle on the CDO losses, but that they can't calculate the CDS losses that are derived from their (or other's) CDOs. This would be a failure of higher-order, leveraged math.
Translation: we have examples in the market place of price discovery, it's just that we don't those those results so we chose to ignore them. If we were to use those examples as evidence of pricing, we would be wiped out as an going concern and that is not acceptable to management, hence why we claim we're not able to quantify.
This is from the SOX review by both AIG staff and the outside auditors. The inside people may have been pushed aside and the outside auditors took up the fight.
There is generally a tremendous amount of pushback and politically charged bullying to overcome before a outside auditors judge a Material Weakness.
A Material Weakness is the worst deficiency category in SOX. I've seen some fairly screwed up companies get by without a MW.
One more thing, what is the compensating control for not being able to value a large part of your balance sheet?
I think Stuart wrapped it up nicely. My point was that these people are effectively playing the little kids game of storming off when they dont like how the game is played. "If you're going to make me price things like that, I'm leaving." So they just say, nah, don't want to do it, not gonna do it, so there. I'd say that is some serious financial innovation.
AIG "is" the counterparty. They wrote the credit protection, someone else owns it and is expecting to get paid. They real questions is how many hedge fund CDS writers are in the same position as AIG, but with little to no capital.
I agree with Stuart. They didn't like the spreads, so they said it can't be done. Which is the same as saying they are waiting for the spreads to improve before they can magically arrive at a value. Good luck with that.
In even simpler language: The first paragraph says "we don't know what we're doing" and the second says "Our auditors don't approve that we don't know what we're doing, but we're going to ignore them."
The question is whether, given those two statements, PwC still considers AIG an Ongoing Concern.
...AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs...
And in the next paragraph this.
...AIG believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value of AIGFPs super senior credit default swap portfolio...
We don't know how much the CDOs are worth, so we'll just assume they're worth X; but don't worry we've got really great controls in place that make sure we get the correct price.
Well, on the plus side, it's possible that pre-SOX (and pre Arthur Anderson getting stomped) this sort of stuff would have been ignored and burried.
One other thing. The CDS writers need to hedge themselves. Buying back the credit protection is impossible as the markets are illiquid. So is shorting the underlying bonds. The only way is a "macro" hedge: shorting a basket of equities that correlate with the underlying bonds. This "macro hedging" has the potential to be a big deal given the size of the CDS market.
What are the panalties for filing a false SEC statement?
AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs
Of course you can AIG. Sell one. ONE. Put it out there, see what's bid. This really pisses me off. This isn't some form of disagreement on accounting methodology. They are lying to the SEC. The truth is they don't want to know what this used toilet paper is worth not that they don't know how to value it. If regulators are going to be able to do anything about this mess they had better start right here with this materially false filing.
AIG is an enormous and no doubt profitable account for PWC. If PWC is dropping the accounting hammer, I believe it is for GOOD reason. The fact that AIG can no longer be given "the benefit of the doubt" scares me.
Enron and Worldcom are proof that there is no such thing as too big to fail.
This really pisses me off. This isn't some form of disagreement on accounting methodology. They are lying to the SEC. The truth is they don't want to know what this used toilet paper is worth not that they don't know how to value it. If regulators are going to be able to do anything about this mess they had better start right here with this materially false filing.
The fact that their accounting method is basically covering their ears and yelling "la-la-la I can't hear you" is sucktacular, but since they pretty much said so in their filing I'm strangely OK with it.
It's all the other companies that are doing something similar and aren't mentioning it that are grinding my gears. 'Cause you know that if one company is admitting it, then there's a whole bunch of others out there trying to get away with it.
DaveNYC,
So, you think that a company that competes with AIG and has similar reported results might have the same issues with valuations? You'll never distinguish yourself on Wall St. with rational thinking like that.
It looks to me like AIG wanted to take a $3.6 billion positive adjustment and PwC said no.
Therefore they are taking the full $5b hit in their year end filing.
So what they are trying to say is that we took the hit but we don't believe it. I guess the market does.
Unless someone else wants to read it and has another take.
Look at col (4) -- they say they aren't taking it.
"therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio at December 31, 2007"
I think you may be misreading the filing. Near as I can tell, the 11/30 numbers had a favorable 'basis adjustment' in the amount of $3.6 Bn. This statment:
"However, as a result of current difficult market conditions, AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio at December 31, 2007."
Seems to imply they won't be using that adjustment going forward (i.e., much worse market value numbers should be expected). Don't know about the material weakness (no real accounting/auditing background), but it looks like the filing may be saying "we were overly generous in our valuation in the past, and the current market is so bad that we can't justify those levels and the associated valuation methods anymore"
rob dawg + angry saver = great one-two punch. I don't your gimlet eyes on CNBC, just goo-goo-googley ones, with equal bewilderment about the replacement of Altria and Honeywell in the Dow.
In the sprit of your posts above: why are talking heads are at a loss to describe the addition of BAC and Chevron? Rupert Murdoch, who is a knave, runs DJ. Instead of pretending that Wall Street Journal editors are rearranging the list with their time-honored probity, somene ought to be considering the positions of Rupert and his buddies.
No opinion on Chevron here, but adding BAC is throwing an anchor to the Dow as it drowns. Index shorts must be pleased.
I took the $3.6b to be the amount of disagreement with their auditors.
Putting the puzzle pieces together:
Exhibit 1: AIG has not yet determined the amount of the increase in the cumulative decline in fair value of AIGFPs super senior credit default swap portfolio to be included in its December 31, 2007 financial statements. AIG is still accumulating market data in order to update its valuation of the AIGFP super senior credit default swap portfolio.
Exhibit 2: For prior months AIG used the ABX to calculate valuations (Note 4, SEC filing).
And what is stopping them from using the presumably acceptable methodology from previous months? could it be the precipitous drop in the ABX indices in December?
They have market data, but the market data doesn't "resolve", as the markets are currently disconnected, so they're going with mark-to-model (e.g. mark-to-myth) pricing. They're disclosing it, and there's an argument to be made that there isn't coherent market data available, but it is definitely Not Good.
And any time an auditor says anything, anything at all, about the accounting statements being anything less than perfect, that is a Bad Sign.
"AIG has not yet determined how much the value of AIG Financial's super senior credit default swap (CDS) portfolio had declined as of December 31, 2007, it said."
AIG went over all of this in detail in a December 07 investor day. They claim they have not made any payments on CDS written and they do not expect to in the future. They claimed CDO losses would have to hit 20-25% before the super senior pieces took a hit. They further stated they felt the CDS written were insurance contracts which were not required to be marked to market, They did say there was an ongoing debate with the auditors if the CDS should be classified as derivative contracts and marked to market. It looks like this school of thought prevailed. I am not taking sides, just throwing it out there.
A $3.6B additional hit would suck, but I imagine that the key bit is taking that sort of hit would put them dangerously close to some sort of contract clause someplace. An unwind or margin call or something; because it's not like the stockmarket is going to look at this filing and go 'oh, well AIG says they know what they're doing so we'll go with the $1.6 instead of the $5.9 number.
"Stripping out the benefit puts the cumulative unrealized valuation loss on AIGFP's CDS portfolio at nearly $4.9 billion through the first two months of the fourth quarter, compared with $1.6 billion if the benefit was factored in."
Not enough to threaten their capitalization, but it's the old roach theory: once you see one problem, you have to start wondering how many others there are that you don't see.
"AIG (AIG): This company is a buy because it has the right bonds, and not those associated with sub-prime mortgages. In addition, AIG is aggressively buying back shares," Cramer said. (08/09/07)
Then Jim started reading CR and now Jim says: TheStreet Video.
If the hit from 1.6 to 5.9 bil was the final number, it would not be a big deal. It is not the final number, still waiting for the 12/31 number on Feb. 11th. This is scaring everyone out of the stock.
You say either and I say either, You say neither and I say neither
Either, either Neither, neither, Let's call the whole thing off.
You like potato and I like potahto, You like tomato and I like tomahto
Potato, potahto, Tomato, tomahto, Let's call the whole thing off
But oh, if we call the whole thing off Then we must part
And oh, if we ever part, then that might break my heart
So if you like pyjamas and I like pyjahmas, I'll wear pyjamas and give up
pyajahmas
For we know we need each other so we , Better call the whole off off
Let's call the whole thing off.
say father, and you say pater, I saw mother and you say mater
Pater, mater Uncle, auntie, let's call the whole thing off.
I like bananas and you like banahnahs, I say Havana and I get Havahnah
Bananas, banahnahs Havana, Havahnah, Go your way, I'll go mine
So if I go for scallops and you go for lobsters, So all right no contest we'll
order lobseter
For we know we need each other so we, Better call the calling off off,
Let's call the whole thing off.
OT: I made a trek into Sebastian country (NC) to visit grandma this weekend. Two anecdotal items:
(1) Grandma and new grandpa (both previously widowed) are looking to build a house on land he owns. Builders tripping over each other to not only get the work, but start ASAP.
(2) Tons of car lots, all of them packed to capacity with brand new trucks . . . and none of it is moving.
Resale market I couldn't say, but in a couple of subdivisions it looked like between 5 and 10% of homes were for sale.
This is in Hickory, NC. Better news from downtown Charlotte, with the new light rail and entertainment options it appears to be getting a pied a terre market for more affluent suburb/rural types who want some culture.
I'm having trouble. Can someone point me to the line on my Sch C 1040 where I book my cash flow diversion features?
Used extensively in ABS CDOs in the past, pro rata pay structures enable each tranche of a CDO to receive a percentage of distributable interest or principal amount regardless of class seniority. If there is a coverage test breach, however, the structure reverts back to sequential pay, which protects the most senior bondholders.
Oh, I get it. I don't pay the phone bill or the cable bill in order to pay the electric bill. Then i get to call the money i don't pay to phone of cable income. Jeez, I know that isn't what they are doing and all the Super Secret Ninja Accountants here can cite chapter and verse as to how and why this is necessary but the whole thing makes me wonder if Shakespeare was talking about accountants instead of lawyers in Henry VI.
Generally, different investors will own different slices of CDO risk. At the Senior Level, when things are good, often all the bonds will be paid "pro-rata", meaning in proportion to their principal balances. When things get bad, sometimes their are triggers that get tripped. These, generally, will divert cash from some senior bonds to pay the most senior bonds first. It seems that AIG insures bonds that benefit from these triggers (i.e., the most senior, or 'super senior' bonds), but that AIG didn't account for this benefit in the past (probably because their model was built on the same specious reasoning as their CDS business - i.e., things will never get bad enough to trip the triggers anyway). I do imagine that these triggers offer them some real economic benefit in the current default/loss environment, but that this benefit won't be the same order of magnitude as their loss.
LOS ANGELES - Countrywide Financial Corp., under pressure to help stem growing home loan defaults, says it will expand programs to help borrowers manage their mortgage payments regardless of the type of subprime loan they have or whether they have already fallen behind on payments
Dawg: Why would you pay the least little bit of attention to anything Cramer says? He is an ACTOR, not a financial analyst or anything like that. Orlando Bloom could do as well as he does in valuing stocks.
Could PriceWaterhouse's actions have anything to do with AIG's payment, in 2005, of 1.64 billion to settle charges that it used deceptive accounting practices to mislead investors & regulatory agencies? As AG, Spitzer went after AIG, and as a result the then CEO/Chairman, 'Hank' Greenburg (or is it Greenberg?), was forced out by the AIG board. His successor, Martin Sullivan, ended up restating AIG's income, etc., twice, back to 2000 with (I think) a loss of 2 billion in equity, 4 billion of profit. As part of the settlement, in addition to the money, AIG agreed to adopt "accounting reforms."
Spitzer also filed against Greenburg individually, and that litigation may still be going on--although two charges (of 6) charges were dropped in 2006--these are civil charges, Spitzer dropped the criminal charges. But the charges still concern securities fraud, fraudulent business practices.
I'm not doubting that AIG has CDS problems, only saying that the auditors might be feeling a bit antsy, given AIG's rather checkered past.
Greenburg is a billionaire and currently runs the C.V. Starr fund--which I think is a kind of investment fund--investors restricted solely to past CEOs and CFOs (very high management) of AIG--if I am remembering correctly some of the well done Wall St J articles covering the above events. I don't subscribe to the Wall St J anymore so I can't get into its archives.
What we have here with AIG is a shot across the bow for every thinking analyst as as prime example of how any firm holding this crap is accounting for them and the degree management will go to to perpetrate intentional reporting fraud and deceit. Any auditor reading this now knows first hand what to expect during up coming audits. Audit firms better do their jobs this time, else they will get sued as much as the rating agencies.
Could PriceWaterhouse's actions have anything to do with AIG's payment, in 2005, of 1.64 billion to settle charges that it used deceptive accounting practices to mislead investors & regulatory agencies?
Probably. Part of the reason Anderson got nuked from orbit is because they had a recent history of shady doings. Post-SOX, most auditing firms should be taking their clients' SEC history when deciding when to make a stink. The letter of the law is not as much protection as it used to be.
Re: alter the way it values its credit default swaps involving collateralized debt obligations
Reinsurance is the next slut to be exposed and IMHO Buffetts $30 Billion of Goodwill Accounting will look very different after the old fool is forced to come clean with his Level 3 Unobservable Assets and the accounting mechanics for his charades -- which relate to the current AIG story -- to alter the way it values its credit default swaps involving collateralized debt obligations.
Buffett may not have CDOs per say, but he does have goodwill accounting that is not 100% accounted for IMHO:
See also: Custodial Receipts, variable rate master demand notes, certificated depositary interests, Privately Issued Mortgage-Backed Securities, Letter of Possession, Blank Letters of Representation, Asset Backed Securities, and various crap related to GASB No. 40 which eliminates custodial risk disclosure. Etc...
Seems every rock we turn over has roaches hiding and every roach we follow just leads to more rocks... as another poster wrote "some day this war's going to end". Yes, but not for a while, a long while.
Everyone try this when it comes time to cash in your 401k's. The "observable value" may be zero....but all you'll have to do is produce an old statement showing the highest balance you can find and viola!
Re: AIG disclosed that earlier estimates of its derivatives had included an adjustment for cash flow diversion. However due to difficult market conditions it will not include the adjustment in determining the fair value of AIGFP's super senior credit default swap portfolio.
Thats called risk management, i.e,
therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio
This is also called false and misleading information, and in some states, fraud, but its only fraud in a few counties in Nevada I think, but maybe Tanta has something on that?
We have modest allocations to high grade at $864 million, mezzanine approximately $872 million and minimal exposure to CDO squared at about $54 million. Of course we recognize the likelihood for ratings migration given the actions that we have seen in the market and that Chuck mentioned, but we do believe it to be manageable within the context of the overall portfolio. Why? The granular segment of our portfolio represents 35 separate deals, 95% of these transactions attached to the senior or super senior levels and indeed we have it diversified by vintage and manager.
Gregory R. Diamond - Director, Investor Relations
Is the derivative asset the amount of mark-to-market losses recoverable from reinsurance?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
The derivative asset on the balance sheet just represents the positive mark-to-market on all derivatives where we are a net receiver and largely would not be the insured credit derivative.
Gregory R. Diamond - Director, Investor Relations
Okay. What portion of the derivative asset is associated with reinsurance from companies that are watched to be down graded below AAA?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
And again, no portion of a derivative asset is associated with reinsurance. So, I am not sure how to answer that. We talked about our reinsurers and the amount of the portfolio that they cover and while we havent gone through a detail on their rating status I think that we have acknowledged that Channel Re our largest reinsurer is on review for downgrade at Moodys. Our next largest reinsurer is probably Ram Re, the negative outlook from S&P but its stable with Moodys and as for these smaller ones I am, I just dont have a good read at this point.
Gregory R. Diamond - Director, Investor Relations
Okay. Heres a question that we have asked, we have answered many, many times, both here today and on prior occasions but since its being asked again. We will answer it again. Do any insurance contracts structured or CDS or otherwise that you have written required to post collateral in the event of downgrades?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
No.
The Company (PMI GROUP) has a 42.0% equity ownership interest in FGIC Corporation, the holding company of Financial Guaranty Insurance Company (collectively FGIC), a New York-domiciled financial guaranty insurance company. The Company also has equity ownership interests in CMG Mortgage Insurance Company, CMG Mortgage Reinsurance Company and CMG Mortgage Assurance Company (collectively CMG MI), which conduct residential mortgage insurance business for credit unions. The Company also has equity ownership interests in RAM Holdings Ltd., the holding company of RAM Reinsurance Company, Ltd. (collectively RAM Re), a financial guaranty reinsurance company based in Bermuda.
Financial Guaranty includes the equity in earnings from FGIC and RAM Re, and the financial results of PMI Guaranty.
Financial Guaranty . We are the lead investor in FGIC Corporation, whose wholly-owned subsidiary, Financial Guaranty Insurance Company (collectively, FGIC), provides financial guaranty insurance. We also have a significant interest in RAM Holdings Ltd., whose wholly-owned subsidiary, RAM Reinsurance Company, Ltd., or RAM Re, provides financial guaranty reinsurance. Our Financial Guaranty segment also includes PMI Guaranty Co., our wholly-owned surety company based in New Jersey. PMI Guaranty was formed in 2006 to provide financial guaranty insurance, financial guaranty reinsurance and related credit enhancement products and services. Our Financial Guaranty segment generated a net loss of $24.4 million for the third quarter of 2007 and net income of $34.5 million for the first nine months of 2007, compared to net income of $23.7 million and $68.8 million for the corresponding periods in 2006.
RE: jk "They further stated they felt the CDS written were insurance contracts which were not required to be marked to market, They did say there was an ongoing debate with the auditors if the CDS should be classified as derivative contracts and marked to market. "
Ha. Good luck with that AIG. Two years ago I was trained on CDS MTM. I thought it should be insurance as well, but I was wrong. The main point was that they're written on ISDA docs, so they're a derivative, so they get marked to market. Also, insurance isn't actively traded like CDS. So we got the bids, compared them quarter to quarter, and hoped management wouldn't shoot the messenger when we told them how much the loss was going to be.
Below is a letter written by activist investor William Ackman to Moodys ratings agency in response to their AAA rating on the companies despite substantial losses. It is an interesting read that sheds a lot of light on the whole bond insurance situation
January 18, 2008 SEC Investor - Ackman on MBIA and Ambac (MBI, ABK) - The Insider's Guide to SEC Filings
As of September 30, 2007, MBIA has re-insured approximately $80 billion of par value of its exposures. More than $42 billion of this reinsurance was purchased from Channel Re, a Bermuda- based reinsurer whose only customer is MBIA. The two most senior officers of Channel Re are former executives of MBIA. MBIA owns 17% of the company and has two representatives on Channel Res board of directors.
On recent conference calls, Moodys and S&P have stated that they have not yet updated their ratings of the monoline reinsurers including Channel Re. Earlier this week, on January 16th, Partner Re and Renaissance Re, the majority equity owners of Channel Re, wrote off the entire value of their investments in Channel Re due to losses it has recently incurred that substantially exceed Channel Res capital, an impairment that Channel Res two majority owners have concluded is other than temporary.
Despite the fact that Channel Re has negative book equity and $42 billion of MBIAs credit exposure $21.5 billion of which is CDOs of ABS or CLO/CBOs Moodys and S&P continue to rate the company Triple A with a stable outlook. Fitch does not rate Channel Re and apparently relies on S&Ps and Moodys stale Triple A ratings in its analysis of MBIAs capital adequacy.
Captive reinsurers whose ratings are not regularly updated offer the potential for abuse.
We believe that MBIA reinsured on a quota share basis 25% of its 2007 CDO transactions with Channel Re. As a result of Moodys and S&P not updating its ratings of Channel Re, these exposures do not appear on MBIAs list of exposures and have not been included in your calculation of MBIAs capital adequacy.
MBIAs second largest reinsurer is Ram Re which has reinsured $11 billion of par as of September 30, 2007. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd., the parent company of Ram Re, has declined 92% in the last year. The company currently trades as a penny stock with a market value of $32 million.
We believe that Ram Re is substantially undercapitalized and therefore, like Channel Re, is unlikely to be able to meet its obligations to MBIA.
The butterfly effect is a phrase that encapsulates the more technical notion of sensitive dependence on initial conditions in chaos theory.
In 1961, Lorenz was using a numerical computer model to rerun a weather prediction, when, as a shortcut on a number in the sequence, he entered the decimal .506 instead of entering the full .506127 the computer would hold. The result was a completely different weather scenario.[2] Lorenz published his findings in a 1963 paper for the New York Academy of Sciences noted that "One meteorologist remarked that if the theory were correct, one flap of a seagull's wings could change the course of weather forever." Later speeches and papers by Lorenz used the more poetic butterfly.
Anyone that really cares about the subject needs to go to the AIG web site and look at the slides from their December investors conference.
The announcement today was that they are NOT taking the credit that they think they should -- i.e. they are booking the higher number.
PwC isn't backing down. Right now, the accounting firms don't really need accounts. After sarbox and Anderson's demise, there aren't enough firms to go around. Plus if you are the auditor you can't do consulting. A lot of big firms have a couple of the others doing consulting on things like sarbox or other assignments. It's a different world.
As far as I'm concerned, I think AIG has a point and I believe them that their estimates are better then a so called market estimate that doesn't really exist. These are over the counter, custom contracts and market is just an estimate. Also, their model uses market prices on the underlying securities to model the losses. A more granular mark to market, if you will.
The attachment points on these contracts are really quite high and not likely to result in losses. They are also relatively short duration, so they should start to unwind reasonably soon.
I believe them on this issue, but they do have a trillion dollars in assets and some of them are going to be bad. If not this, then something else. In fact, probably something else.
Pre tax, they earn $20b a year. Before it is all over, if they get by with $50 in writedowns, they will probably be lucky.
Other then the usual intelligent posters, most of the negative ranting is done by people that haven't read the SEC filing.
I shouldn't be surprised, but you might want to read the reference before adding uninformed and totally misguided invective.
Frankly, I find it amazing that they are continuing to push PwC on this. As of now, they are going to back down and book the larger loss at year end.
If they didn't have a trillion in assets and this was really and truly the only issue, AIG would be a strong buy.
It's time for AIG to be dropped from DOW...
Plus, industrial companies have become less important to the stock market, Dow Jones said.
Schadenfreude
Dow Jones said it will make mathematical changes to the way it computes the value of the index before Feb. 19 so that the change in components will not affect the index's level.
fun w/numbers..
Sounds a lot like; its so bad were having trouble even counting that high.
That's got to sting:
AIG: Summary for AMER INTL GROUP NEW- Yahoo! Finance
you must admire their lawyers. I can't imagine some rational person writing somethng like this down and filing it with a straight face.
AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential
Since my I've yet to earn my Uberdegree, I may misunderstand this sentence. But to me it seems to say, "We can't tell if we lost 30 percent or 40%, so we'll call it 0%."
It's tooooooooooooooooo COMPLICATED waaaaaaaaaaaaaaaahhhhhhhhh!!! I'm taking my bat, and my ball, and I'm going home.
AIG also needs to raise cash. This CDS problem will complicate that.
The tide is going out. Who else is swimming naked?
Looks like PWC doesn't want to end up lynched like Aurther Andersen.
The financials are just to opaque for me. Even career analysts like Bove have no idea what's on their balance sheets let alone how its being valued.
Could someone please clarify this a bit for me? It sounds like AIG should have a handle on the CDO losses, but that they can't calculate the CDS losses that are derived from their (or other's) CDOs. This would be a failure of higher-order, leveraged math.
This problem is magnified if the counter parties to the CDS's are insolvent. D'oh!
Translation: we have examples in the market place of price discovery, it's just that we don't those those results so we chose to ignore them. If we were to use those examples as evidence of pricing, we would be wiped out as an going concern and that is not acceptable to management, hence why we claim we're not able to quantify.
Angry Saver writes:
This problem is magnified if the counter parties to the CDS's are insolvent. D'oh!
This could be a very good explanation. However just let us know who these counter parties are. We will let AIG go.
This is from the SOX review by both AIG staff and the outside auditors. The inside people may have been pushed aside and the outside auditors took up the fight.
There is generally a tremendous amount of pushback and politically charged bullying to overcome before a outside auditors judge a Material Weakness.
A Material Weakness is the worst deficiency category in SOX. I've seen some fairly screwed up companies get by without a MW.
One more thing, what is the compensating control for not being able to value a large part of your balance sheet?
I think Stuart wrapped it up nicely. My point was that these people are effectively playing the little kids game of storming off when they dont like how the game is played. "If you're going to make me price things like that, I'm leaving." So they just say, nah, don't want to do it, not gonna do it, so there. I'd say that is some serious financial innovation.
AIG "is" the counterparty. They wrote the credit protection, someone else owns it and is expecting to get paid. They real questions is how many hedge fund CDS writers are in the same position as AIG, but with little to no capital.
I agree with Stuart. They didn't like the spreads, so they said it can't be done. Which is the same as saying they are waiting for the spreads to improve before they can magically arrive at a value. Good luck with that.
Helen - Stuart translated it.
In even simpler language: The first paragraph says "we don't know what we're doing" and the second says "Our auditors don't approve that we don't know what we're doing, but we're going to ignore them."
The question is whether, given those two statements, PwC still considers AIG an Ongoing Concern.
First there's this.
...AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs...
And in the next paragraph this.
...AIG believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value of AIGFPs super senior credit default swap portfolio...
We don't know how much the CDOs are worth, so we'll just assume they're worth X; but don't worry we've got really great controls in place that make sure we get the correct price.
Well, on the plus side, it's possible that pre-SOX (and pre Arthur Anderson getting stomped) this sort of stuff would have been ignored and burried.
Sorry for the typos above.
One other thing. The CDS writers need to hedge themselves. Buying back the credit protection is impossible as the markets are illiquid. So is shorting the underlying bonds. The only way is a "macro" hedge: shorting a basket of equities that correlate with the underlying bonds. This "macro hedging" has the potential to be a big deal given the size of the CDS market.
so the next move is really about PwC? Quit being their auditor?
What are the panalties for filing a false SEC statement?
AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs
Of course you can AIG. Sell one. ONE. Put it out there, see what's bid. This really pisses me off. This isn't some form of disagreement on accounting methodology. They are lying to the SEC. The truth is they don't want to know what this used toilet paper is worth not that they don't know how to value it. If regulators are going to be able to do anything about this mess they had better start right here with this materially false filing.
AIG is an enormous and no doubt profitable account for PWC. If PWC is dropping the accounting hammer, I believe it is for GOOD reason. The fact that AIG can no longer be given "the benefit of the doubt" scares me.
Enron and Worldcom are proof that there is no such thing as too big to fail.
SOX = sarbanes oxley.
SOX
Carry on.
Since all these companies are smaller now are they still to big to fail?
This really pisses me off. This isn't some form of disagreement on accounting methodology. They are lying to the SEC. The truth is they don't want to know what this used toilet paper is worth not that they don't know how to value it. If regulators are going to be able to do anything about this mess they had better start right here with this materially false filing.
The fact that their accounting method is basically covering their ears and yelling "la-la-la I can't hear you" is sucktacular, but since they pretty much said so in their filing I'm strangely OK with it.
It's all the other companies that are doing something similar and aren't mentioning it that are grinding my gears. 'Cause you know that if one company is admitting it, then there's a whole bunch of others out there trying to get away with it.
01/20/2009 end of an error writes:
Since all these companies are smaller now are they still to big to fail?
this is a good one.
DaveNYC,
So, you think that a company that competes with AIG and has similar reported results might have the same issues with valuations? You'll never distinguish yourself on Wall St. with rational thinking like that.
It looks to me like AIG wanted to take a $3.6 billion positive adjustment and PwC said no.
Therefore they are taking the full $5b hit in their year end filing.
So what they are trying to say is that we took the hit but we don't believe it. I guess the market does.
Unless someone else wants to read it and has another take.
Look at col (4) -- they say they aren't taking it.
"therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio at December 31, 2007"
Eh, on the tech side they consider rational thinking to be a plus.
I think you may be misreading the filing. Near as I can tell, the 11/30 numbers had a favorable 'basis adjustment' in the amount of $3.6 Bn. This statment:
"However, as a result of current difficult market conditions, AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio at December 31, 2007."
Seems to imply they won't be using that adjustment going forward (i.e., much worse market value numbers should be expected). Don't know about the material weakness (no real accounting/auditing background), but it looks like the filing may be saying "we were overly generous in our valuation in the past, and the current market is so bad that we can't justify those levels and the associated valuation methods anymore"
rob dawg + angry saver = great one-two punch. I don't your gimlet eyes on CNBC, just goo-goo-googley ones, with equal bewilderment about the replacement of Altria and Honeywell in the Dow.
In the sprit of your posts above: why are talking heads are at a loss to describe the addition of BAC and Chevron? Rupert Murdoch, who is a knave, runs DJ. Instead of pretending that Wall Street Journal editors are rearranging the list with their time-honored probity, somene ought to be considering the positions of Rupert and his buddies.
No opinion on Chevron here, but adding BAC is throwing an anchor to the Dow as it drowns. Index shorts must be pleased.
No....they booked column 1 at september.
They want to book column 5 at year end.
PwC won't let them.
Col 5 is based on adjustments form cash prices on credit spreads.
I took the $3.6b to be the amount of disagreement with their auditors.
Putting the puzzle pieces together:
Exhibit 1: AIG has not yet determined the amount of the increase in the cumulative decline in fair value of AIGFPs super senior credit default swap portfolio to be included in its December 31, 2007 financial statements. AIG is still accumulating market data in order to update its valuation of the AIGFP super senior credit default swap portfolio.
Exhibit 2: For prior months AIG used the ABX to calculate valuations (Note 4, SEC filing).
Exhibit 3: ABX
.
And what is stopping them from using the presumably acceptable methodology from previous months? could it be the precipitous drop in the ABX indices in December?
OK.....they are still arguing with PwC.
They wanna book col 5 but have to book col 1. We still have the Nov to Dec number for final hit.
They had $104 billion in shareholders equity at September.
Does no one see the irony in BAC , buying CFC, and getting added to the DOW...
is it irony..or somethin else?
i think it is a good move by dow to be more representative since we are all subprime now
They have market data, but the market data doesn't "resolve", as the markets are currently disconnected, so they're going with mark-to-model (e.g. mark-to-myth) pricing. They're disclosing it, and there's an argument to be made that there isn't coherent market data available, but it is definitely Not Good.
And any time an auditor says anything, anything at all, about the accounting statements being anything less than perfect, that is a Bad Sign.
From the Yahoo! article:
Expired
"AIG has not yet determined how much the value of AIG Financial's super senior credit default swap (CDS) portfolio had declined as of December 31, 2007, it said."
Yikes.
AIG went over all of this in detail in a December 07 investor day. They claim they have not made any payments on CDS written and they do not expect to in the future. They claimed CDO losses would have to hit 20-25% before the super senior pieces took a hit. They further stated they felt the CDS written were insurance contracts which were not required to be marked to market, They did say there was an ongoing debate with the auditors if the CDS should be classified as derivative contracts and marked to market. It looks like this school of thought prevailed. I am not taking sides, just throwing it out there.
A $3.6B additional hit would suck, but I imagine that the key bit is taking that sort of hit would put them dangerously close to some sort of contract clause someplace. An unwind or margin call or something; because it's not like the stockmarket is going to look at this filing and go 'oh, well AIG says they know what they're doing so we'll go with the $1.6 instead of the $5.9 number.
From the same article:
"Stripping out the benefit puts the cumulative unrealized valuation loss on AIGFP's CDS portfolio at nearly $4.9 billion through the first two months of the fourth quarter, compared with $1.6 billion if the benefit was factored in."
Not enough to threaten their capitalization, but it's the old roach theory: once you see one problem, you have to start wondering how many others there are that you don't see.
"AIG (AIG): This company is a buy because it has the right bonds, and not those associated with sub-prime mortgages. In addition, AIG is aggressively buying back shares," Cramer said. (08/09/07)
Then Jim started reading CR and now Jim says: TheStreet Video.
And not so much as a hat tip or tip jar nod.
If the hit from 1.6 to 5.9 bil was the final number, it would not be a big deal. It is not the final number, still waiting for the 12/31 number on Feb. 11th. This is scaring everyone out of the stock.
I'd say the "super senior credit default swaps" should be on "double-secret probation."
What a complete farce.
You say either and I say either, You say neither and I say neither
Either, either Neither, neither, Let's call the whole thing off.
You like potato and I like potahto, You like tomato and I like tomahto
Potato, potahto, Tomato, tomahto, Let's call the whole thing off
But oh, if we call the whole thing off Then we must part
And oh, if we ever part, then that might break my heart
So if you like pyjamas and I like pyjahmas, I'll wear pyjamas and give up
pyajahmas
For we know we need each other so we , Better call the whole off off
Let's call the whole thing off.
Good point jk, there's also the precedent thing, once you value items using 'X' chances are you're going to be stuck valuing them using 'X'.
Actually, verse 3 is better.
say father, and you say pater, I saw mother and you say mater
Pater, mater Uncle, auntie, let's call the whole thing off.
I like bananas and you like banahnahs, I say Havana and I get Havahnah
Bananas, banahnahs Havana, Havahnah, Go your way, I'll go mine
So if I go for scallops and you go for lobsters, So all right no contest we'll
order lobseter
For we know we need each other so we, Better call the calling off off,
Let's call the whole thing off.
OT: I made a trek into Sebastian country (NC) to visit grandma this weekend. Two anecdotal items:
(1) Grandma and new grandpa (both previously widowed) are looking to build a house on land he owns. Builders tripping over each other to not only get the work, but start ASAP.
(2) Tons of car lots, all of them packed to capacity with brand new trucks . . . and none of it is moving.
Resale market I couldn't say, but in a couple of subdivisions it looked like between 5 and 10% of homes were for sale.
This is in Hickory, NC. Better news from downtown Charlotte, with the new light rail and entertainment options it appears to be getting a pied a terre market for more affluent suburb/rural types who want some culture.
I'm having trouble. Can someone point me to the line on my Sch C 1040 where I book my cash flow diversion features?
Used extensively in ABS CDOs in the past, pro rata pay structures enable each tranche of a CDO to receive a percentage of distributable interest or principal amount regardless of class seniority. If there is a coverage test breach, however, the structure reverts back to sequential pay, which protects the most senior bondholders.
Oh, I get it. I don't pay the phone bill or the cable bill in order to pay the electric bill. Then i get to call the money i don't pay to phone of cable income. Jeez, I know that isn't what they are doing and all the Super Secret Ninja Accountants here can cite chapter and verse as to how and why this is necessary but the whole thing makes me wonder if Shakespeare was talking about accountants instead of lawyers in Henry VI.
Rob Dawg-
Generally, different investors will own different slices of CDO risk. At the Senior Level, when things are good, often all the bonds will be paid "pro-rata", meaning in proportion to their principal balances. When things get bad, sometimes their are triggers that get tripped. These, generally, will divert cash from some senior bonds to pay the most senior bonds first. It seems that AIG insures bonds that benefit from these triggers (i.e., the most senior, or 'super senior' bonds), but that AIG didn't account for this benefit in the past (probably because their model was built on the same specious reasoning as their CDS business - i.e., things will never get bad enough to trip the triggers anyway). I do imagine that these triggers offer them some real economic benefit in the current default/loss environment, but that this benefit won't be the same order of magnitude as their loss.
Fitch places AIG on ratings watch negative. This isn't good, is it? LOL
Fitch Places AIG Debt Ratings on Rating Watch Negative
PS What happens if their rating goes down a couple of notches?
Yahoo! 404 - Page Not Found
LOS ANGELES - Countrywide Financial Corp., under pressure to help stem growing home loan defaults, says it will expand programs to help borrowers manage their mortgage payments regardless of the type of subprime loan they have or whether they have already fallen behind on payments
The company said last month it helped more than 81,000 borrowers keep their mortgage payments manageable in 2007.
Wow, talk about Autistic economics, Kramer's latest AIG vid has him rocking and nodding like someone with an impaired central nervous system....
Dawg: Why would you pay the least little bit of attention to anything Cramer says? He is an ACTOR, not a financial analyst or anything like that. Orlando Bloom could do as well as he does in valuing stocks.
thank you Zac.
And from Krugman...nice discount from par chart on leveraged loans decline...
Just remember, the financial problems are contained - Paul Krugman Blog - NYTimes.com
Over the Limit
the real grass roots credit crunch
j - "like someone with an impaired central nervous system"
LOL! He's really a clown. Problem is, he's not alone. That numbskull Dennis Kneal is arguably even less coherent.
Dawg: Why would you pay the least little bit of attention to anything Cramer says?
Why? Can't sell without a buyer.
Could PriceWaterhouse's actions have anything to do with AIG's payment, in 2005, of 1.64 billion to settle charges that it used deceptive accounting practices to mislead investors & regulatory agencies? As AG, Spitzer went after AIG, and as a result the then CEO/Chairman, 'Hank' Greenburg (or is it Greenberg?), was forced out by the AIG board. His successor, Martin Sullivan, ended up restating AIG's income, etc., twice, back to 2000 with (I think) a loss of 2 billion in equity, 4 billion of profit. As part of the settlement, in addition to the money, AIG agreed to adopt "accounting reforms."
Spitzer also filed against Greenburg individually, and that litigation may still be going on--although two charges (of 6) charges were dropped in 2006--these are civil charges, Spitzer dropped the criminal charges. But the charges still concern securities fraud, fraudulent business practices.
I'm not doubting that AIG has CDS problems, only saying that the auditors might be feeling a bit antsy, given AIG's rather checkered past.
Greenburg is a billionaire and currently runs the C.V. Starr fund--which I think is a kind of investment fund--investors restricted solely to past CEOs and CFOs (very high management) of AIG--if I am remembering correctly some of the well done Wall St J articles covering the above events. I don't subscribe to the Wall St J anymore so I can't get into its archives.
Just some background.
What we have here with AIG is a shot across the bow for every thinking analyst as as prime example of how any firm holding this crap is accounting for them and the degree management will go to to perpetrate intentional reporting fraud and deceit. Any auditor reading this now knows first hand what to expect during up coming audits. Audit firms better do their jobs this time, else they will get sued as much as the rating agencies.
Could PriceWaterhouse's actions have anything to do with AIG's payment, in 2005, of 1.64 billion to settle charges that it used deceptive accounting practices to mislead investors & regulatory agencies?
Probably. Part of the reason Anderson got nuked from orbit is because they had a recent history of shady doings. Post-SOX, most auditing firms should be taking their clients' SEC history when deciding when to make a stink. The letter of the law is not as much protection as it used to be.
Re: alter the way it values its credit default swaps involving collateralized debt obligations
Reinsurance is the next slut to be exposed and IMHO Buffetts $30 Billion of Goodwill Accounting will look very different after the old fool is forced to come clean with his Level 3 Unobservable Assets and the accounting mechanics for his charades -- which relate to the current AIG story -- to alter the way it values its credit default swaps involving collateralized debt obligations.
Buffett may not have CDOs per say, but he does have goodwill accounting that is not 100% accounted for IMHO:
See also: Custodial Receipts, variable rate master demand notes, certificated depositary interests, Privately Issued Mortgage-Backed Securities, Letter of Possession, Blank Letters of Representation, Asset Backed Securities, and various crap related to GASB No. 40 which eliminates custodial risk disclosure. Etc...
Seems every rock we turn over has roaches hiding and every roach we follow just leads to more rocks... as another poster wrote "some day this war's going to end". Yes, but not for a while, a long while.
Question for any CPAs here.
Do level 3 & level 2 gains get booked as profits? If so, are taxes only paid if and when gains are realized?
TIA.
Yep, I often think Cramer has an ulterior motive and that he's talking (or shouting) his book.
Kneal, on the other hand, is just a dumb clown.
Everyone try this when it comes time to cash in your 401k's. The "observable value" may be zero....but all you'll have to do is produce an old statement showing the highest balance you can find and viola!
Re: AIG disclosed that earlier estimates of its derivatives had included an adjustment for cash flow diversion. However due to difficult market conditions it will not include the adjustment in determining the fair value of AIGFP's super senior credit default swap portfolio.
Thats called risk management, i.e,
therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFPs super senior credit default swap portfolio
This is also called false and misleading information, and in some states, fraud, but its only fraud in a few counties in Nevada I think, but maybe Tanta has something on that?
As a public service to my fellow comrades, enjoy this, I beg you:
MBIA, Inc. Q4 2007 Earnings Call Transcript
posted on: February 04, 2008
MBIA, Inc. Q4 2007 Earnings Call Transcript -- Seeking Alpha
We have modest allocations to high grade at $864 million, mezzanine approximately $872 million and minimal exposure to CDO squared at about $54 million. Of course we recognize the likelihood for ratings migration given the actions that we have seen in the market and that Chuck mentioned, but we do believe it to be manageable within the context of the overall portfolio. Why? The granular segment of our portfolio represents 35 separate deals, 95% of these transactions attached to the senior or super senior levels and indeed we have it diversified by vintage and manager.
Gregory R. Diamond - Director, Investor Relations
Is the derivative asset the amount of mark-to-market losses recoverable from reinsurance?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
The derivative asset on the balance sheet just represents the positive mark-to-market on all derivatives where we are a net receiver and largely would not be the insured credit derivative.
Gregory R. Diamond - Director, Investor Relations
Okay. What portion of the derivative asset is associated with reinsurance from companies that are watched to be down graded below AAA?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
And again, no portion of a derivative asset is associated with reinsurance. So, I am not sure how to answer that. We talked about our reinsurers and the amount of the portfolio that they cover and while we havent gone through a detail on their rating status I think that we have acknowledged that Channel Re our largest reinsurer is on review for downgrade at Moodys. Our next largest reinsurer is probably Ram Re, the negative outlook from S&P but its stable with Moodys and as for these smaller ones I am, I just dont have a good read at this point.
Gregory R. Diamond - Director, Investor Relations
Okay. Heres a question that we have asked, we have answered many, many times, both here today and on prior occasions but since its being asked again. We will answer it again. Do any insurance contracts structured or CDS or otherwise that you have written required to post collateral in the event of downgrades?
C. Edward Chaplin - Vice-Chairman and Chief Financial Officer
No.
The Company (PMI GROUP) has a 42.0% equity ownership interest in FGIC Corporation, the holding company of Financial Guaranty Insurance Company (collectively FGIC), a New York-domiciled financial guaranty insurance company. The Company also has equity ownership interests in CMG Mortgage Insurance Company, CMG Mortgage Reinsurance Company and CMG Mortgage Assurance Company (collectively CMG MI), which conduct residential mortgage insurance business for credit unions. The Company also has equity ownership interests in RAM Holdings Ltd., the holding company of RAM Reinsurance Company, Ltd. (collectively RAM Re), a financial guaranty reinsurance company based in Bermuda.
Financial Guaranty includes the equity in earnings from FGIC and RAM Re, and the financial results of PMI Guaranty.
Financial Guaranty . We are the lead investor in FGIC Corporation, whose wholly-owned subsidiary, Financial Guaranty Insurance Company (collectively, FGIC), provides financial guaranty insurance. We also have a significant interest in RAM Holdings Ltd., whose wholly-owned subsidiary, RAM Reinsurance Company, Ltd., or RAM Re, provides financial guaranty reinsurance. Our Financial Guaranty segment also includes PMI Guaranty Co., our wholly-owned surety company based in New Jersey. PMI Guaranty was formed in 2006 to provide financial guaranty insurance, financial guaranty reinsurance and related credit enhancement products and services. Our Financial Guaranty segment generated a net loss of $24.4 million for the third quarter of 2007 and net income of $34.5 million for the first nine months of 2007, compared to net income of $23.7 million and $68.8 million for the corresponding periods in 2006.
RE: jk "They further stated they felt the CDS written were insurance contracts which were not required to be marked to market, They did say there was an ongoing debate with the auditors if the CDS should be classified as derivative contracts and marked to market. "
Ha. Good luck with that AIG. Two years ago I was trained on CDS MTM. I thought it should be insurance as well, but I was wrong. The main point was that they're written on ISDA docs, so they're a derivative, so they get marked to market. Also, insurance isn't actively traded like CDS. So we got the bids, compared them quarter to quarter, and hoped management wouldn't shoot the messenger when we told them how much the loss was going to be.
Below is a letter written by activist investor William Ackman to Moodys ratings agency in response to their AAA rating on the companies despite substantial losses. It is an interesting read that sheds a lot of light on the whole bond insurance situation
January 18, 2008
SEC Investor - Ackman on MBIA and Ambac (MBI, ABK) - The Insider's Guide to SEC Filings
As of September 30, 2007, MBIA has re-insured approximately $80 billion of par value of its exposures. More than $42 billion of this reinsurance was purchased from Channel Re, a Bermuda- based reinsurer whose only customer is MBIA. The two most senior officers of Channel Re are former executives of MBIA. MBIA owns 17% of the company and has two representatives on Channel Res board of directors.
On recent conference calls, Moodys and S&P have stated that they have not yet updated their ratings of the monoline reinsurers including Channel Re. Earlier this week, on January 16th, Partner Re and Renaissance Re, the majority equity owners of Channel Re, wrote off the entire value of their investments in Channel Re due to losses it has recently incurred that substantially exceed Channel Res capital, an impairment that Channel Res two majority owners have concluded is other than temporary.
Despite the fact that Channel Re has negative book equity and $42 billion of MBIAs credit exposure $21.5 billion of which is CDOs of ABS or CLO/CBOs Moodys and S&P continue to rate the company Triple A with a stable outlook. Fitch does not rate Channel Re and apparently relies on S&Ps and Moodys stale Triple A ratings in its analysis of MBIAs capital adequacy.
Captive reinsurers whose ratings are not regularly updated offer the potential for abuse.
We believe that MBIA reinsured on a quota share basis 25% of its 2007 CDO transactions with Channel Re. As a result of Moodys and S&P not updating its ratings of Channel Re, these exposures do not appear on MBIAs list of exposures and have not been included in your calculation of MBIAs capital adequacy.
MBIAs second largest reinsurer is Ram Re which has reinsured $11 billion of par as of September 30, 2007. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd., the parent company of Ram Re, has declined 92% in the last year. The company currently trades as a penny stock with a market value of $32 million.
We believe that Ram Re is substantially undercapitalized and therefore, like Channel Re, is unlikely to be able to meet its obligations to MBIA.
Buffett, buffett, buffett.
See also: Sensitive dependence on initial conditions
Or
Butterfly effect:
Butterfly effect - Wikipedia, the free encyclopedia
The butterfly effect is a phrase that encapsulates the more technical notion of sensitive dependence on initial conditions in chaos theory.
In 1961, Lorenz was using a numerical computer model to rerun a weather prediction, when, as a shortcut on a number in the sequence, he entered the decimal .506 instead of entering the full .506127 the computer would hold. The result was a completely different weather scenario.[2] Lorenz published his findings in a 1963 paper for the New York Academy of Sciences noted that "One meteorologist remarked that if the theory were correct, one flap of a seagull's wings could change the course of weather forever." Later speeches and papers by Lorenz used the more poetic butterfly.
Reinsurance, reinsurance & reinsurance!!!!
Sell!
Anyone that really cares about the subject needs to go to the AIG web site and look at the slides from their December investors conference.
The announcement today was that they are NOT taking the credit that they think they should -- i.e. they are booking the higher number.
PwC isn't backing down. Right now, the accounting firms don't really need accounts. After sarbox and Anderson's demise, there aren't enough firms to go around. Plus if you are the auditor you can't do consulting. A lot of big firms have a couple of the others doing consulting on things like sarbox or other assignments. It's a different world.
As far as I'm concerned, I think AIG has a point and I believe them that their estimates are better then a so called market estimate that doesn't really exist. These are over the counter, custom contracts and market is just an estimate. Also, their model uses market prices on the underlying securities to model the losses. A more granular mark to market, if you will.
The attachment points on these contracts are really quite high and not likely to result in losses. They are also relatively short duration, so they should start to unwind reasonably soon.
I believe them on this issue, but they do have a trillion dollars in assets and some of them are going to be bad. If not this, then something else. In fact, probably something else.
Pre tax, they earn $20b a year. Before it is all over, if they get by with $50 in writedowns, they will probably be lucky.
Other then the usual intelligent posters, most of the negative ranting is done by people that haven't read the SEC filing.
I shouldn't be surprised, but you might want to read the reference before adding uninformed and totally misguided invective.
Frankly, I find it amazing that they are continuing to push PwC on this. As of now, they are going to back down and book the larger loss at year end.
If they didn't have a trillion in assets and this was really and truly the only issue, AIG would be a strong buy.