Tuesday, December 9, 2008

AIG Reporting in the WSJ - Atrocious

I never set out to defend AIG, but this WSJ story is hopelessly confusing.  It sounds like what they are trying to say is that there are an additional $10 billion in losses, based unidentified sources, that have not yet been disclosed.
Fine, I suppose.  However, then they repeat parts of last month's SIV/bailout.  This is not news in any respect, but gets announced as if it hasn't already been reported, booked in AIG financials, etc.  The multi sector CDO's that AIG guaranteed via CDS's are being settled in such a way there is no material uncertainty.  Just like they announced.  As I described in an earlier post regarding the AIG bailout, they are just settling up $65-70 billion in CDS's.  Per the Journal:
As of Nov. 25, Maiden Lane III had acquired CDOs with an original value of $46.1 billion from AIG's counterparties and had entered into agreements to purchase $7.4 billion more. It is still in talks over $11.2 billion.
So the SIV is buying $60.3 billion in multi sector CDO's. That's less then $70 billion. The SIV is using a $5 billion investment from AIG, Up to $30 billion in FRBNY loan, and the rest is being written off by AIG. They had already written off most of this, so the new bad news in November was relatively modest.

The problem is that the WSJ staff writers don't seem to understand anything about accounting.  The "news" last month was that AIG was going to honor its CDS promises.  Once that fact sunk in (if it ever did), the exact mechanism is irrelevant.  That is, the counter parties were made whole.  If you bought a CDS from AIG on a $10 million multi sector cdo, then you get the $10 million and AIG got the cdo, which it then sold to the SIV at a discount.  It doesn't matter if you send the collateral back, mail in the cdo, and then get your $10 million.  Or if you keep $5 million in collateral, mail in the cdo, and the remaining $5 million.  You had an insurance contract for $10 million, and you got your $10 million.  However, the WSJ writers seem to get caught up regarding when the collateral was posted as if that was news.

The only new news is that there may be additional losses.  AIG said:
...that exposure has been fully disclosed and amounts to less than $10 billion of AIG's $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30

The WSJ writers are also hung up on whether a CDS is a speculative bet or a credit protection instrument. It is obviously both. How many times does AIG need a beat down in print over the same dumb mistake?

There is also some confusion about what I think might be CDS swaps where the purchaser didn't own the underlying.  It is impossible to figure out what the journal writers are getting at, but they want it to sound dramatic. 

There may or may not be additional AIG losses that haven't been disclosed.  However it would not be surprising if AIG's trillion in assets have taken a few hits since the 3Q financials.  A coherent discussion by the Journal might have shed some light on it.  But breathlessly rehashing last month's news adds nothing.


No comments: