Read love letters between the SEC & AIG

Remember last fall when the world's financial system came within hours of completely melting down? Welp, the SEC has released letters it exchanged with AIG starting in spring 2008.

Check post at Footnoted.org.
Do some investigative reporting and read the letters at SEC's site.

There's some fascinating stuff in there like this.

From this link at SEC:

Question by SEC attorney, note date:

Form 10-Q for the Fiscal Quarter Ended March 31, 2008

Note 4—Shareholders’ Equity and Earnings (Loss) Per Share, page 19

1.

You disclose that you shortened the vesting period of outstanding awards under your share-based employee compensation plans during the first quarter of fiscal 2008. Please provide us your evaluation of the modification[.]

Another exchange in the same document:

2. You state that your credit-based analyses estimate potential realized credit pre-tax losses of approximately $1.2 billion to approximately $2.4 billion, as compared to the $20.6 billion of unrealized market losses recognized in the fourth quarter of 2007 and first quarter of 2008. Please expand your disclosure to explain the specific factors causing the divergence between your estimates of fair value and amounts to be ultimately realized upon settlement maturity.

AIG Response:

The unrealized market valuation losses of $20.6 billion recorded on AIGFP’s super senior credit default swap portfolio represent the cumulative change in fair value of these derivatives. Consistent with the definition of fair value in the Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157), the unrealized market valuation loss of $20.6 billion represents AIG’s best estimate of the amount it would need to pay to a willing, able and knowledgeable third-party to assume the obligations under AIGFP’s super senior credit default swap portfolio as of March 31, 2008.

On the other hand, AIG’s estimate of the potential pre-tax realized credit losses of approximately $1.2 billion to approximately $2.4 billion as of March 31, 2008 represents its then current estimate of the potential credit losses that it may incur if the multi-sector CDO portion of AIGFP’s super senior credit default swap portfolio and the referenced obligations acquired by AIGFP in extinguishing its obligations under the swaps are held to maturity. Credit losses represent a point-in-time estimate, using information available at that particular date, of the potential shortfall of principal and/or interest cash flows on the referenced obligations and credits underlying the portfolio that will not be recovered assuming the credit derivative portfolio and referenced obligations are held to maturity. At March 31, 2008, AIG derived its estimates of the potential pre-tax realized credit losses by applying two distinct methods, a ratings-based static stress test and a roll rate analysis.

At March 31, 2008, the estimates for the range of the potential realized credit losses were lower than the fair value of AIGFP’s super senior multi-sector CDO credit default swap portfolio, a net loss of $19.3 billion at March 31, 2008. The fair value of AIGFP’s super senior multi-sector CDO credit default swap portfolio is based upon fair value accounting principles, which rely on third-party prices for both the underlying collateral securities and the CDOs that AIGFP’s super senior credit default swaps wrap. These prices currently incorporate liquidity premiums, risk aversion elements and credit risk modeling, which in some instances may use more conservative assumptions than those used by AIG in its roll rate stress testing. Due to the ongoing disruption in the U.S. residential mortgage market and credit markets and the downgrades of RMBS and CDOs by the rating agencies,the market continues to lack transparency around the pricing of these securities. These prices are not necessarily reflective of the ultimate potential realized credit losses AIGFP could incur in the future related to the AIGFP super senior multi-sector CDO credit default swap portfolio, and AIG believes they incorporate a significant amount of market-driven risk aversion.

In conducting its risk analyses as of June 30, 2008, AIG discontinued use of the rating-based static stress test and used only the roll rate stress test because it believes that the roll rate stress test provides a more reasonable analysis methodology to illustrate potential realized credit losses than the rating-based static stress test used previously.

To the uneducated, say someone like me, it appears AIG gave "x" number of employees early vesting, re: faster bonuses, at the same time they were trying to explain to the SEC why their hallucinogenic valuations of their credit default swap portfolio was $18B "off".

Note the date of this correspondence? March 2008.

Remember Bear Sterns?

There's been people working on the story of the possibility Bear Sterns was "bailed out" by JPMorgan Chase & us because Bear Sterns was going to bring down JPMorgan with it.