Professor Elam

Got that?  It seems Price Waterhouse Coopers the outside auditor for insurance giant AIG, has questions about the Internal Control systems. It is dificult to value, are you ready, the super senior credit default swap portfolio.  Gee it is hard enuogh to write it or say it much less value it!  We will be studying derivatives in a few days in intermediate accounting.  Once again uncertainties about the credit side of the balance sheet has uncertainty spreading throughout the investment community.  See my previous post about CLOs. AIG is down 11% on that news this morning. This follows a continued series of bad news events for AIG since Hank Greenburg got the boot. 

SARBOX Sarbanes Oxley requires the outside auditor to comment on the effectiveness of IC Internal Controls. IC should allow amounts to be reported correctly. When one cannot value assets clearly we have an IC problem.  Markets never like uncertainty, they run from it, they sell into it, and that is what we have here.

And so sub prime brings mortgage woes which have spread to loan woes which spreads to uncertain cash flows from investing in CMOs and CLOs which leads to IC uncertainty and credit downgrades which makes it tougher to borrow which raises junk debt rates and lowers AAA interest rates as investors pile into high quality bonds and out of uncertain investments. Get all that?  You will if you have been reading the blog and the links we highlight!