Tuesday, January 26, 2010

One Year Before Crisis, I Told Jamie Dimon and Warren Buffett AIG Had Serious Trouble (and Goldman Sachs Knew Too)

Thanks to Simoleon Sense for pointing this Janet Tavakoli article out:
In August 2007, the Wall Street Journal's David Reilly called for hot news.* I replied that AIG had material mark-to-market losses for the second quarter of 2007, yet it took no write-downs whatsoever for its credit default swaps on underlying mortgage related "super senior" collateralized debt obligations (CDOs). I looked at one aggregate position of credit default swaps (CDSs) amounting to more than $19 billion.** The mark-to-market losses were just one part of the problem. Since too many of the assets backing the position had high risk of severe principal losses, it also had a lot of "cliff risk," as in falling off of one. AIG had a grave problem just from this position alone, and AIG had other serious problems.

Initially, I agreed to talk to Reilly on background, but I didn't want to be named or quoted. AIG vigorously denied it would ever take a write-down or a loss on the CDSs, much less one that was material to its earnings statement. Reilly called me again asking if I were sure. I said I was positive. He called AIG again and then me, asking for a quote this time. I didn't want to get into a fight with AIG in the "Heard on the Street" column and reminded Reilly that I only agreed to talk to him on background. Reilly's editor called me and said that given that AIG's denial was so forceful, the paper needed me to go on the record. I know and trust this editor, so I agreed. Reilly quoted me but omitted that I said the difference was material. Even the Wall Street Journal hesitates to use the word "material" to describe an accounting misstatement. It guarantees a conference call with lawyers.

I called Warren Buffett about my concerns, but stuck to the public information already in the article.
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