The story of the day once again focuses on the (lack of) actions of Treasury Secretary Tim Geithner, who according to recent revelations courtesy of Darrell Issa, did all he could to prevent material disclosure at AIG indicating the sad shape of the company in a filing released on Christmas Eve in 2008. The kicker can be seen on the crossed out section in the attached memorandum, where Geithner made it clear that he was willing to withhold materially public information vis-a-vis the bailout of AIG counterparties at 100 cents on the dollar, that only became public months later after intense political inquiry. The whole part discussing this in the December 24, 2008 SEC filing was eliminated under Geithner's instructions:

As a result of this transaction, the AIGFP counterparties received 100 percent of the par value of the Multi-Sector CDOs sold and the related CDS have been terminated. ML III has now acquired approximately $[62.1] billion in par amount of Multi-Sector CDOs and has aggregate liabilities resulting from its borrowings from the NY fed of approximately $[___] billion.

We aren't sure, SEC, but in our opinion this consitutes a pretty dramatic and forced lack of public disclosure for what was still a public company? And if that wasn't enough, the following guidance from Mr. Geithner should be sufficient for Judge Rakoff to immediately add Mr. Geithner to the list of people who will soon have their fate determined by a jury of their peers. Because while the SEC has proven beyond a reasonable doubt it does not care for proper disclosure of information any more, Mr. Geithner's admonition is simply staggering:

"Note that there should be no discussion or suggestion that AIG and the NY Fed are working to structure anything else at this point."

How ironic this blatant obfuscation would eventually turn out to be...

Yet one of the very relevant pieces of information is also contained in what was previously undisclosed:

On December 17, 2008, AIGFP entered into Amendment No. 1 to the Shortfall Agreement, dated November 25, 2008, with Maiden Lane III LLC in connection with ML III's purchase, on December 18, 2008 of $[ ] billion in par amount of additional multi-sector collateralized debt obligations, including $[ ] billion of Multi-Sector CDOs previously held by AIGFP as a result of exercise of 2a-7 Puts.

Ah, the mythical 2a-7 "puts." Let's recall a little blurb from AIG's Q2 2008 conference call, where Citadel's Dan Johnson' leads the following exchange:

Operator Next question comes from Dan Johnson, Citadel Investments. Your line is open. Daniel Johnson - Citadel Investments Great, thank you very much. Would you folks mind giving us a little bit more of a tutorial around the issues referred to as 2a-7 Puts I believe its on page 87, of the Q, just basically trying to understand how many more I guess clients could put this business back to you that would cause you to generate more CDOs as we did in the second quarter? Elias Habayeb - Chief Financial Officer AIG Financial Services Dan it's Elias Habayeb. With respect to the 2a-7 at this point we have written all the 2a-7s we're committed to write. So that's the maximum amount of 2a-7 Puts that we have outstanding. The way those work is that that if there is a failed remarketing then we would have potential obligation to buy the CDO back and/or the underlying security back and on most of them we do have backstop liquidity lines in the event those bonds have been put back to us. Daniel Johnson - Citadel Investments And is it that we don't have any more exposure to this because there is been no failed remarketings or even that whole issue is basically there are no more 2a-7 that we would be on, potentially on a risk for? Elias Habayeb - Chief Financial Officer AIG Financial Services No, we do have outstanding 2a-7 Puts that continue to be outstanding and given the current state of the market we would be expecting to be buying back those underlying referenced obligations. Daniel Johnson - Citadel Investments And if sometime now what that means from capital consumption? Elias Habayeb - Chief Financial Officer AIG Financial Services Not at this point.

Our legal experts is looking evaluating whether or not this disclosure by then AIGFP CFO Elias Habayeb may constitute 10(b)-5 fraud. In either case, we will present a much broader analysis of 2a-7 puts due to their close connection to a topic near and dear to us and our readers: money markets, which all fall under the purview of Rule 2a-7. We are midly curious why AIGFP had material exposure to money market portfolio enhancing arrangements:

Rule 2a-7 currently characterizes certain features that enhance the credit or liquidity of portfolio securities as "puts" and "unconditional puts."<(10)> To clarify terminology used in rule 2a-7, the Commission proposed to replace these terms with a new term -- "guarantee" -- that would include a wide-range of arrangements designed to unconditionally support the credit of the issuer of a security...Since 1986, rule 2a-7 has permitted a fund to rely exclusively on the credit quality of the issuer of an "unconditional demand feature" in determining whether a security meets the rule's credit quality standards.<(13)> The 1996 Amendments also permitted a fund to exclude from the rule's issuer diversification standards a security subject to an unconditional demand feature provided by a person that does not control, or is not controlled by or under common control with, the issuer of the security ("non-controlled person").<(14)>

We are also very curious why 2a-7 puts were the proximal cause for billions in multi-sector CDO exercises. Lastly, we are extremely curious at how many other entities (aside from AIG) 2a-7 puts may play a comparable destructive and destabilizing influence at the nexus of structured finance and money markets.

In the meantime, here is the full letter, courtesy of Bloomberg, that should make any ambivalence in calls for Tim Geithner's immediate resignation moot.

and this one: