Kernel from -proposed (3.2.0-80-generic) resolves the bug.

L0: 12.04 running 3.2.0-80-generic
L1: 14.10 (utopic) -> /dev/kvm is available
L2: 14.04 (trusty) -> I was able to bootstrap the instance and ssh into it

L0: 12.04 running 3.2.0-80-generic
L1: 15.04 (vivid) -> /dev/kvm is available
L2: 14.04 (trusty) -> I was able to bootstrap the instance and ssh into it

Results:
(1) /dev/kvm exists for both L1/utopic and L1/vivid
(2) nested virtualization is functional and L2 guests can be bootstrapped

Thanks to everyone!
Special thanks to Stefan for providing us with the fix.

** Tags removed: verification-needed-precise
** Tags added: verification-done-precise

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https://bugs.launchpad.net/bugs/1431473

Title:
  kvm_intel (nested) module will not load [Input/output error]

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