I found another red flag at AIG that was waving long before this company teetered and fell.

It was in the, excuse my language here, super senior credit default swap portfolio.

Rolls off the tongue, doesn’t it?

It’s complicated.

But here’s the simple part: They caused huge losses that AIG underestimated until recently.

In December, AIG’s auditor Price Waterhouse Coopers said that it had issues with the way AIG was valuing these swaps. So AIG in February said it would change its ways.

The result was a ratcheting upward of the estimated losses.

Upward from an estimated loss of $352 million at the end of September 2007, according to a story on FinancialWeek.com. The estimated loss on its super senior credit default swap portfolio in August in its SEC filing: $5.6 billion.

So the loss was 16 times greater than what AIG estimated it to be last year.

And who knows if that’s really it?

Here’s a stab at defining what these super seniors are:

Credit default swaps are essentially insurance for a debt obligation. The debt consisted of a group of residential mortgages. The debt was divided up into categories, officially called tranches, that line up by who gets paid first, if the debt goes bad. The super senior category stands toward the front of the line.

But down there at the back of the line is a mortgage that may go bad. No one wants these swaps right now. The mortgages are going bad, the insurance has to pay off. The value of these swaps plummeted.

Months and months ago.

In public filings, for all to see.