AIG: Mixed Signals and Blind Pools

From AIG's SEC filing (June 29):

The nature of the information provided or otherwise available to AIGFP regarding the performance and credit quality of the underlying assets in each regulatory capital CDS transaction is not consistent across all transactions. Furthermore, in a majority of corporate loan transactions and all of the residential mortgage transactions, the pools are blind, meaning that the identities of obligors are not disclosed to AIGFP. In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP’s public disclosure of information relating to the underlying referenced assets. AIGFP analyzes the information regarding the performance and credit quality of the underlying pools of assets required to make its own risk assessment and to determine any changes in credit quality with respect to such pools of assets. While much of this information received by AIGFP cannot be aggregated in a comparable way for disclosure purposes because of the confidentiality restrictions and the inconsistency of the information, it does provide a sufficient basis for AIGFP to evaluate the risks of the portfolio and to determine a reasonable estimate of fair value.

Ok, information is not consistent and the pools are blind yet AIG has the ability to assess changes in credit quality? Thus far they have not shown an abundance of skill in these pursuits. Due to confidentiality, they cannot aggregate the information for disclosure? One might posit that the aggregation would help overcome the confidentiality of the information.

If AIG cannot disclose it and information is not consistent, how does the Fed assess their risks?

But there is hope that everything gets better:

The regulatory benefit of these transactions for AIGFP’s financial institution counterparties is generally derived from the terms of the Capital Accord of the Basel Committee on Banking Supervision (Basel I) that existed through the end of 2007 and which is in the process of being replaced by the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee on Banking Supervision (Basel II). Financial institution counterparties are expected to transition from Basel I to Basel II over a two-year adoption period through December 31, 2009, after which they will receive little or no additional regulatory benefit from these CDS transactions, except in a small number of specific instances, and therefore AIGFP expects that the counterparties will terminate the vast majority of these transactions within the next 12 months. The pace at which these CDS transactions will be terminated following the transition to Basel II is affected by a number of factors, including the credit performance of the underlying assets.

I wonder: Do rose colored glasses help the blind?

Disclosure: Long the AIG capital structure (long and wrong)

Comments

[Ed Zimmer]

And people wonder why the experts can't easily explain what is behind this mess and how soon we can expect things to "turnaround"

2009 Jul 01 02:25 PM

[jayminho]

aig is dead man.
dead with over 5b shares and 4b authorized to issue shares
they just rs'ed, and now, will most likely issue a bunch of shares = massive dilution.
they are playing around with everyone..
aig is dead. dead and gone. (not gone.. not yet..)

2009 Jul 02 09:15 AM

[Sabas33]

How is AIG trading at $19? Wasn't it just like $3 a share last week? What happened? Anyone?

2009 Jul 02 12:15 PM

[Ryu Mei Co]

It had a reverse split 1:20


On Jul 02 12:15 PM Sabas33 wrote:

> How is AIG trading at $19? Wasn't it just like $3 a share last week?
> What happened? Anyone?

2009 Jul 02 08:13 PM

[[e-mail]]

Actually, rose colored glasses do help many blind people. Being blind typically does not mean the person doesn't perceive light. To the contrary, bright light can be quite disturbing to many blind persons. Hence, dark or rose colored glasses are often worn to mitigate the nebulous glare. Moral of the story: one should be careful when asking a redundant question in trying to make a point.

2009 Jul 02 10:36 PM

[Moon Kil Woong]

"Confidentiality restrictions that preclude AIGFP’s public disclosure of information" With all the regulatory bodies governing financial companies don't you think they should write at least one regulation making such restrictions null void or illegal. This is especially true when they are talking about tradable theoretically marketable instruments that must be valued in public companies.

Add this to the batch of other rules that are in the public's best interest that never get written or enforced.

2009 Jul 02 11:05 PM