AIG's "$10 billion" writedown hysterics

Friday I wrote about AIG and the "scare" the market had over the rumour of the $10 billion writedown, that I summarily dismissed. Now I'll highlight the garbage that passes for research on the street, that's pinged between hedge funds attempting a raid on a stock.

Here's how the raid starts.

A junior level assistant attempting to make a name for himself, spots this tidbit of information on AIG's latest 10-Q on page 65. So the senior level trader lays out some shorts,and then this news is spread.

Since 1998, AIGFP has written super senior (AAA+) protection through credit default swaps, a portion of which is exposed to CDOs of residential mortgage-backed securities and other asset-backed securities. At June 30, 2007, the notional amount of this credit derivative portfolio was $465 billion, including $64 billion from transactions with mixed collateral that include U.S. subprime mortgages.

So how do you get the $10 billion dollar writedown? Look at the $64 billion figure, with CDO's. So mix apples and oranges and start a raid. Investors use the ABX index to track the subprime market. The triple A component trades at .84 cents on the dollar. So take $64 billion, x .84 and you have 53.8 billion. The difference? $10.2 billion dollars. So they scream AIG has exposure of $10 billion, and will take this writeoff when they report earnings. It's so sophomoric it's pathetic. But the street, blindly sells, and Thursday was another wonderful buying opportunity.

Maybe traders should have read AIG's 10-K. They would of seen this:

AIGFP maintains the ability opportunistically to economically hedge specific securities in a portfolio and thereby further limit its exposure to loss and has hedged outstanding transactions in this manner on occasion. AIGFP has never had a payment obligation under these credit derivatives transactions where AIGFP is providing credit protection on the super senior risk. Furthermore... no transaction has experienced credit losses in an amount that has made the likelihood of AIGFP having to make a payment, in AIGFP’s view, to be greater than remote, even in severe recessionary market scenarios.

$10 billion? Give me a break.

Now to finish the raid, the street screams that Genworth Financial, which was reporting after Thursday's close, and Countrywide Financial, which reported Friday before the open, were both rumored to be calamitous situations. What fools. Look at the prices that CFC (13.07), and GNW(25.48) closed at Thursday. To top it off, Cramer screams on CNBC at 2:30 that PMI and MTG were both going out of business.

Now the Treasury department was already talking with CFC. They didn't want CFC to cut the dividend because that would further erode the psyche of the market. We already knew this news. So let's play out the scenario. What if CFC was going to report terrible news Friday? We already knew this? If their was such a frightening scenario for the market, the Fed could of cut the discount rate before the market opened Friday. But MSFT had huge earnings Thursday after the close, so they did the heavy lifting! And if you can't follow this, you shouldn't trade these stocks. Trade those stocks that aren't battlegrounds. But don't sell your other stocks because you're getting panicked by these pathetic raids.

On Friday morning, when I said Cramer was completely wrong on the mortgage insurers, it was an easy call. I already saw the foolishness on Thursday.

What happened Friday? CFC closed at 17.30 up 4.23 or 33% on the day. The NASDAQ ramped, and the shorts were steamrollered, and the mortgage insures romped.

As advertised.