Is AIG code for SOL?

Dear Congressman Boehner,

I am unsure of your financial background as you used to be a "businessman" (according to Wikipedia). However, since you have a business degree from Xavier University here in Cincinnati you probably have some financial savvy in regards to how businesses work.

However, you would be a very rare individual if you fully understood what it was the AIG actually does and how it got into a big enough mess that your colleagues from the Treasury building down the D.C. Mall from your office are putting us on the line to the tune of $150 billion. Yikes... $150 billion... even in D.C. that is a lot of dosh.

Let me put it in Cincinnati terms. That is approximately either 25.4 billion cheese coneys (with or without mustard & onion), 12.5 billion pints of Graeter's ice cream (if Oprah hasn't ordered it all already), or dinner for 2,084,000,000 at the Montgomery Inn (better to first try and make a reservation for that crowd).

For preparation on discussion of AIG's problems I decided to download the 10-K annual filing with the Securities and Exchange Commission (www.sec.gov) to better acquaint myself of their business.

HOLY COW!

No wonder no one could see this coming. The document was 206 pages long in single type small print and did not even include the financial statements, which are included in a separate document. The reason no one saw this coming was that, in all probability, no one actually read this document. It is the driest document on earth, as it is all about insurance, insurance, more insurance, and AIG's many subsidiaries that sell... you guessed it... insurance.

However, I did find this line hidden in their risk disclosure section after numerous other nefarious warnings of how this company might take large bites out of your portfolio in the remote chance that the events discussed actually occur.

So, if I understand correctly, credit default swaps (a side business that AIG got into) do not have a capital reserve requirement (like regulated transactions), but the counter-party in the transactions protect themselves by writing in the following:

AIG’s liquidity may be adversely affected by requirements to post collateral. Certain of the credit default swaps written by AIGFP contain collateral posting requirements. The amount of collateral required to be posted for most of these transactions is determined based on the value of the security or loan referenced in the documentation for the credit default swap. Continued declines in the values of these referenced securities or loans will increase the amount of collateral AIGFP must post which could impair AIG’s liquidity.

Now AIG thought "heck, no problemo! like that could ever happen!"

Guess what... surprise!!! It happened. So, AIG had to come up with a bunch of cash real quick to take care of this little risk event. However, turns out it was more than they thought. Tens of billions to be kind of precise.

Wait! There's more. Lets delve deeper into what they wrote in the 10-K about these "investments":

AIG participates in the U.S. residential mortgage market in several ways: AGF originates principally first-lien mortgage loans and to a lesser extent second-lien mortgage loans to buyers and owners of residential housing; United Guaranty Corporation (UGC) provides
first loss mortgage guaranty insurance for high loan-to-value first- and second-lien residential mortgages; AIG insurance and financial services subsidiaries invest in mortgage-backed securities and CDOs, in which the underlying collateral is composed in whole or in part of residential mortgage loans; and AIGFP provides credit protection through credit default swaps on certain super senior tranches of collateralized debt obligations (CDOs), a significant majority of which have AAA underlying or subordinate layers.

Huh??? Is that in English? A bunch of people must have stayed up real late one night to come up with that paragraph. I think it says that AIG through AIGFP wrote CDS's on CDOs that were composed of MBS's in an AAA tranche with a light hollandaise sauce.

If you add all that together, it probably means any shareholders are going to be SOL pdq....