Bombshell In AIG 10Q: "Capital Relief"
Courtesy of Karl Denninger at The Market Ticker
Now that I’ve had to time to read the entire AIG 10Q there’s a nasty ditty in here that in my opinion goes materially beyond the "going concern" language. It’s here:
A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP’s regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG’s consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.
A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.
So AIG "understands" that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what’s in there – or who owns them) for the explicit purpose of getting around capital requirements – either by banking regulators or (possibly worse) EU sovereign regulations.
When did they come to "understand" this? Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a "recent" revelation of some sort?
Indeed, the section goes on to say:
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.
Isn’t that nice? So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these "assets", their performance, and who is on the other side of the transaction.
Oh, it gets better. The weighted average maturity of these transactions is 1.35 years, we can’t tell what’s left in there, and we also can’t know who’s on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.
Net notional? Oh, that’s nice. Since the claimed underlying "net derivative asset" is essentially nil against this "notional", one wonders what the real risk is on the table here in terms of the firm. Seeing as it’s in the "risks" section of the 10Q, it has to be material to results, right?
Why do I smell sulfur?
