[efarmer]

I love how people use words to gloss over realities,
like saying someone is information challenged when
they are an idiot. This subprime word is very similar.
I could go on and on, but my coffee is kicking in this
morning and I have to go take a good healthy subfood.

[MrBill]

Ah, the old shell game. Find the pea, win a prize. Pay your money and take your chances!
$this->bbcode_second_pass_quote('', 'I')t doesn't seem to matter who's running American International Group Inc. Three years after an accounting scandal cost Hank Greenberg his job as head of the world's largest insurance company, AIG still can't get its numbers right.

In a regulatory filing Monday, AIG said the value of its portfolio of ``super senior'' credit-default swaps fell by $4.88 billion in October and November, four times more than previously disclosed. Its explanation for this revision was a model of obfuscation, and something about it doesn't ring true.

Not once in its seven-paragraph narrative discussion did AIG say how or why the gross losses on these derivatives had soared after Sept. 30. Rather, in almost-unintelligible jargon, it told how in November it developed a new ability to value some large offsetting gains -- and how it then decided this month to exclude most of them because the data weren't reliable.

That was news to investors, who sent AIG's shares plunging.

[DantesPeak]

This is what AIG said in its report dated February. It's very difficlut to understand what they're saying and one gets the impression that they don't know what they are doing.

In fact they say they don't know what their derivatives are worth, and their financial statements do not meet accounting standards.

$this->bbcode_second_pass_quote('', 'I')n connection with the preparation of its 2007 financial reports, American International Group, Inc. (“AIG”) has recently concluded that AIG should clarify and expand its prior disclosures relating to the methodology and data inputs used to determine the fair values of the super senior credit default swap portfolio in respect of multi-sector collateralized debt obligations (“CDOs”) of AIG Financial Products Corp. and AIG Trading Group Inc., including their respective subsidiaries (collectively, “AIGFP”).

As disclosed in AIG’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (the “Form 10-Q”), AIGFP values its super senior credit default swaps using internal methodologies that utilize available market observable information and incorporate management estimates and judgments when information is not available. In doing so, it employs a modified Binomial Expansion Technique (“BET”) model that currently utilizes, among other data inputs, market prices obtained from independent sources, from which it derives credit spreads for the securities constituting the collateral pools underlying the related CDOs. The modified BET model derives default probabilities and expected losses from market prices, not credit ratings. The initial implementation of the BET model did not adequately quantify, and thus did not give effect to, the benefit of certain structural mitigants, such as triggers that accelerate amortization of the more senior CDO tranches.

As disclosed in the Form 10-Q, AIG did not give effect to these structural mitigants (“cash flow diversion features”) in determining the fair value of AIGFP’s super senior credit default swap portfolio for the three months ended September 30, 2007. Similarly, these features were not taken into account in the estimate of the decline in fair value of the super senior credit default swap portfolio through October 31, 2007 that was also included in the Form 10-Q because AIG was not able to reliably estimate the value of these features at that time. Subsequent to the filing of the Form 10-Q, through development and use of a second implementation of the BET model using Monte Carlo simulation, AIGFP was able to reliably estimate the value of these features. Therefore, AIG gave effect to the benefit of these features in determining the cumulative decline in the fair value of AIGFP’s super senior credit default swap portfolio for the period from September 30, 2007 to November 30, 2007 that was disclosed in AIG’s Current Report on Form 8-K/A, dated December 5, 2007 (the “Form 8-K/A”) filed after AIG’s December 5, 2007 Investor Conference.

In addition, during AIG’s December 5 Investor Conference, representatives of AIGFP indicated that the estimate of the decline in fair value of AIGFP’s super senior credit default swap portfolio during November was then being determined on the basis of cash bond prices for securities in the underlying collateral pools, with valuation adjustments made not only for the cash flow diversion features referred to above but also for “negative basis”, to reflect the amount attributable to the difference (the “spread differential”) between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs.

AIG has not yet determined the amount of the increase in the cumulative decline in fair value of AIGFP’s 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. AIG currently expects that the adjustment for cash flow diversion features will be included in determining the fair value of AIGFP’s super senior credit default swap portfolio at December 31, 2007. 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 AIGFP’s super senior credit default swap portfolio at December 31, 2007. The fair value of the super senior credit default swap portfolio for the year ended December 31, 2007 will reflect continuing refinements, if any, of AIG’s valuation methodologies and additional market data.
AIG has been advised by its independent auditors, PricewaterhouseCoopers LLC, that they have concluded that at December 31, 2007, AIG had a material weakness in its internal control over financial reporting and oversight relating to the fair value valuation of the AIGFP super senior credit default swap portfolio. AIG’s assessment of its internal controls relating to the fair value valuation of the AIGFP super senior credit default swap portfolio is ongoing, but AIG believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value of AIGFP’s super senior credit default swap portfolio for purposes of AIG’s year-end financial statements.

[MrBill]

Hmm, in the recesses of my mind I seem to remember that the basic accounting principles were to be conservative, to book expenses as they occur, and to book revenues only when they are realized. I must be hopelessly out of date? ; - )

[uNkNowN ElEmEnt]

$this->bbcode_second_pass_quote('MrBill', 'H')mm, in the recesses of my mind I seem to remember that the basic accounting principles were to be conservative, to book expenses as they occur, and to book revenues only when they are realized. I must be hopelessly out of date? ; - )

[bodigami]

$this->bbcode_second_pass_quote('pedalling_faster', '(')...)

http://www.investorsinsight.com/otb.aspx

it works better if you subscribe to the newsletter, then it comes as a big text file; if you look at the file on his website, it doesn't make as good reading (or listening), it's broken up into about 4 pages and has ads cluttering it up.
(...)

[static66]

As usual, one needs to look at Berkshire Hathaway and what they are up to in this situation... He put billions into the rail stocks because he knows our transportation net is grinding slowly to a halt and rail transport will be absolutley vital to maintaining some semblance of an economy going forward, and in the long run getting emergency food supplies around to the emergency population centers, The bond insurers who are really fucked in this "crisis" were offered a tricky bailout package from Mr. Buffett in the amount of $800billion and included the cream of the crop muni's and leaves the real stinkbomb contracts for the insurer's to deal with (with the govt's help) .... I pledge allegiance to Berkshire Hathaway and the United Companies of the New World Order.... RFID implants cannot be very far off now..... (sorry to mention the Alex Jones NWO... )

[shakespear1]

The Deutsche Bank example in this article nicely shows how these subprime bodies are hard to recover and lead to a real mess for the bank. Mess is too nice of a word, disaster would be better.

Article

[phaster]

with the bail out of bear stearns by JPM and subprime now in the public lexicon, ya all might find this foreign news report interesting (that is 6 months old)

http://www.abc.net.au/4corners/content/ ... 032799.htm

see the "Video on Demand" link to watch the report, just wish I had
shorted the stock back then when it came up on one of my screens, could have made a few extra bucks, oh well there are always other investment opportunites

[efarmer]

http://www.youtube.com/watch?v=SJ_qK4g6ntM

is a very funny and yet factual explanation of subprime

it does contain an unnecessary racial jab that must somehow
be OK in English television but that we enlightened Americans
would wisely replace with gruesome violence or sex to make
acceptable for all audiences.

[MrBill]

Yes, I love that video. Brilliant! ; - )

[Olle]

Can it get any better?

http://youtube.com/watch?v=SJ_qK4g6ntM

[Cashmere]

Yes, it gets better.

See their explanation for the Iraq endeavor.

YouTubeIraq

[roccman]

The subprime fuse was lit 3-5 years pre-PO to trigger economic collapse.

It was designed to coincide with PO.

[Cashmere]

I don't know RC.

I don't think it would take a conspiracy - just a bunch of stupid humans leaving for the moment.

It's happened throughout history.

Neither the Politicians nor the People wanted to hear the message of "use less, prepare for the future."

So everybody got what they wanted - no conspiracy needed.

[eXpat]

Very interesting video here: link.
As things are now, this second wave will be devastating, it may land us with both feet in a proper Depression.

[Rubin_Flagg]

Great video; time to short the markets. Land is going to be really cheap really soon.

[Revi]

That was really scary. It was like a doomer news story. 60 minutes is not a chicken little kind of outfit. These option ARM mortgages are going to really mess the economy up. I couldn't believe when I saw that chart and the worst is in 2010 and 2011.

That guy said that 50-70% of those mortgages will be in default. Ouch!

Things are far worse than I imagined. We won't be out of the credit crunch until 2012 at least.

[sittinguy]

Obama will save us

Really though, that chart was pretty scary.

So,,,, is that it? 2years till TSHTF? 2 years to stock up on TP

[Plantagenet]

$this->bbcode_second_pass_quote('sittinguy', 'O')bama will save us