AIG and Populist Rage
We all know that the government (Bush and Obama, Paulson and Geithner and Bernanke) have been secretly funneling our money to banks, insurance companies and hedge funds, here and abroad, by paying AIG's counterparties' CDS claims. Gretchen Morgenson 3/7/2009
The PTB claim it's all necessary, because otherwise, AIG will go belly-up and the global financial system will go feet in the air. But ---
Are da boyz being paid twice over?
Consider this argument from A Credit Trader's blog via Econbrowser.
It has been widely assumed that AIG's CDS counterparties, all of whom knew that AIG was hugely underpricing these contracts (that is, in the crunch they'd certainly go unpaid), were always relying on the government (the taxpayers) to pay these CDSs off. In other words they accurately predicted the government's future response to the failure of AIG, a financial firm which was too-big-to-fail.
But did they? Were those counterparties that confident of their political prognostication abilities. Probably not. Then, how do you insure yourself against AIG going under and not being able to pay on its contracts?
Buy puts on AIG or short its stock. And why shouldn't we assume that's exactly what these sophisticated counterparties (Goldman Sachs, for example) did. But that means they've already profited from those puts and shorts. They're being paid twice.
I'm enraged! How about you?
Count me in.
Great post and good links. But due to the complexity, I fear that you are likely only going to get fellow elitist rage. That is too bad because this needs more attention
I lifted the following quotes from the argument you reference.
It seems to me that the ultimate protection they bought was in the form of Goldman's Own Hank Paulson.
I am curious if Bernanke is as angry about these trades as he claimed to be about AIG's actions.
March 12, 2009 12:42 AM | Reply | Permalink
non-link?
March 12, 2009 3:07 AM | Reply | Permalink
I'm all raged out for today, Ellen. But maybe you can help me find where the line should get drawn under my rage. Seriously. And no, I don't have this right, but work with me, ok?
1) I'm enraged at both sets of players on this scam. Nail their feet to the floor. That for starters.
2) Then I'm enraged at the pols, regulators & ratings agencies who failed, and the business media hypelords & the dummy reporters & editors. Fire the lot of 'em & publicly shame them.
3) Then there's the big money boys in AIG and also the firms you listed. THEY'VE already paid themselves billions out of these bogus deals, right? Jail 'em, and claw back their ill-gottens.
4) But then there're the non-employees who owned stock in AIG & these others, and who happily took dividends or capital gains based on... those same deals. What do we do there? It was money taken from bogus deals, they owned the company, so...?
5) But these deals didn't just move thin air around, they enabled a lot of real-world activity, like, say, new housing that wouldn't otherwise have occurred. Not just AIG, but the whole gigantic financial apparatus. So, the buyers, the developers, the realtors and lawyers directly involved, and the retailers who got to sell more stuff, and the local property taxpayers who saved. So.... probably not a lot to be done there, unless there was conscious, lower level scamming going on, right?
6) And the systemic effects of all this nasty financial stuff? Well, by giving all that foreign money a home, we enabled the trade deficit to keep walking, which kept foreign goods cheaper, and kept our interest rates happy, and kept taxes lower, and and.... And didn't we all know this was a horseshit, a scam, for much of this past decade? What's an appropriate response to that? I donno.
That's my problem with this, Ellen. To disentangle the affairs of just the one set of thieves - AIG - we quickly find there were dozens and dozens of financial institutions involved, not just investment banks and insurers, and so... what to do? Bailing them out one at a time is a joke. But so is prosecuting just one. Send the worst players off to jail, re-regulate 'em, claw back what you can - fine. That's my starting point.
But right now, each firm is still playing the others off, picking which ones to sink or cannibalize or get Gov't to pay for. They're all playing to cash out before it blows, or... be the last one standing, and eat it all at 7 cents on the dollar.
The more I see of the financial interconnections, and the networks of beneficiaries, benefitting not just today or in the future, but over the last decade... I just do not know how it can be sorted, much less "fairly."
I guess somewhere after my rage burnt out (and it was gone by Sept 07) I just started to want to get some idea how to move ahead, across the board. As for the individual details - beyond jailing the worst of the worst - let's fire the lot, hang the worst, and chain the others to the oars.
Bernie! Put your BACK into it!
March 12, 2009 1:34 AM | Reply | Permalink
Quinn --
Do you know the Celebration of the King of the Bean? In olden times, they'd bake a cake and put a bean in it. Everyone would have a piece. The one who found the bean was named King, and was given complete reign of the village for a week. he could walk into any house, eat any food, screw any wife or daughter. He was expected to be drunk all the time and indulge in any vice for the duration of his reign. At the end of the week, he was stoned in atonment.
A lot of people benefited from this stuff. Some more than others -- some a lot more than others -- but none of it happened in a vacuum. The fee flow of money boosted the economy for a long time. It may have prevented wide-scale collapse after September 11 (maybe not, but we don't know for sure).
Anyone who bought a house (any house, any loan), a car, or almost anything benefited from the games that were being played. The housing industry (3 million jobs lost so far) employed those who bought things. The guys on Wall Street bought things. People who worked in plants bought things. Inflation was minuscule, things were more affordable. That helped everyone. If you didn't buy things, then the people to whom you sold things to did.
Of course, it allowed for pay increases to stall, and led to the rest of the problems we're seeing. But the tendency to look at someone specific, be it AIG, or Citi or anyone involved in the madness, and assign them blame, sounds to me like we've designated them the Kings of the Bean, and we have our rock in hand.
March 12, 2009 10:41 AM | Reply | Permalink
msa: Fascinating. Just fascinating. King of the bean. Eat drink and be merry for next week may never come.
Really fine take.
March 12, 2009 11:33 AM | Reply | Permalink
And what if the bean's in our Java, msa3? ;-)
March 12, 2009 3:00 PM | Reply | Permalink
I just think that the whole economy benefited for a while from this stuff, and trying to lay blame at one sector feels hypocritical. That's why I appreciated your post -- it made a great point I haven't seen made very often.
A whole lot of people were at the party, after all.
March 12, 2009 11:32 PM | Reply | Permalink
Definitely rec'd!
But why stop here? How do we know that Paulson (Or Goldman Sachs) didn't buy puts on or short Lehman Bros? (And so on)
It's a den of snakes, and I think we can all be forgiven for not only mistrusting the lot, but assuming the worst.
I'm kinda' with Quinn on this. How can we ever sort it all out and call the culprits to account? Yet, I remain troubled that Obama still entrusts the biggest players in it all to distribute billions in cash with virtually no transparency. You don't think they'd be robbing us blind, now, would you?
March 12, 2009 1:58 AM | Reply | Permalink
You can check exchange-based derivative histories for such as puts. I suspect it's pretty limited compared to $150B, so maybe some folks did speculate that way but not a lot.
But any bets on AIG should be investigated, just as any payouts by AIG should be subject to government approval and eventual transparency. No money to crooks or gamblers.
March 12, 2009 3:06 AM | Reply | Permalink
Buy puts on AIG or short its stock.
I'm betting that the financial instruments of choice are the credit-recovery swaps, aka recovery locks, which are agreements "bought as insurance by sellers of credit-default swaps, such as banks, hedge funds and insurers."
Because these swaps are privately traded and not on an exchange, details about the contracts are scarce. As of Nov. 08, credit recovery swaps were trading on about 70 companies to the tune of $10b.These things breed like rabbits.
March 12, 2009 3:13 AM | Reply | Permalink
I don't pretend to understand these things, but isn't this just another layer in the pyramid?
March 12, 2009 5:02 PM | Reply | Permalink
from that blog "Did the banks realize the value of its protection held against AIG was zero? Of course they did - they aren’t as dumb as the media suggests."
That sounds criminal if they kept selling CDOs based on such knowledge.
March 12, 2009 3:25 AM | Reply | Permalink
Great Post Ellen,
I wouldn't put it past these parasites to have gamed the system
"I'm mad as hell and damn, I have to take it.
What can we do?
March 12, 2009 5:07 AM | Reply | Permalink
We all know that the government (Bush and Obama, Paulson and Geithner and Bernanke) have been secretly funneling our money to banks, insurance companies and hedge funds, here and abroad, by paying AIG's counterparties' CDS claims.
Interesting theory this.
If AIG is being bailed out in order for it to pay-out CDS claims, how come, in Q4 last year, "of the $62 billion loss being reported, only about $2 billion is a cash loss"?
http://www.nytimes.com/2009/03/02/business/02aigweb.html
The idea that AIG is purely being used as a conduit to line the pockets of other firms doesn't particularly hold up to scrutiny.
So here's the alternative theory of what is happening. AIG's counterparties may or may not have believed that AIG was underpricing credit risk, the point is that protection bought from AIG was often relatively cheap, and also being provided by a AAA rated counterparty. Ambac and MBIA, the so-called monolines, were two other counterparties offering similar features.
But it does not automatically follow that because AAAs provided relatively cheaper protection, they were underpricing credit risk - because they were AAA-rated, they had to post less collateral, so they could offer cheaper protection.
So here is the alternative theory. AIG, as has been clearly established, has been long, indeed very long, credit risk through the credit bubble. And they have gotten this exposure through selling billions, probably trillions, of dollars of credit protection.
This means that they have been, and continue to be paid, regular premiums for offering this protection. AIG still takes in billions of dollars through premiums on CDS contracts and other derivative products which have not been subject to a credit event.
Where a credit event has occurred, then AIG cash settle with the counterparty that had bought protection. Or perhaps they take physical delivery, though I would think this pretty rare.
In Q4 2008 then, AIG more or less took in P in premiums and paid out C in claims, where C - P = -2bn.
So how to you lose 62bn when your free cash flow is only -2bn?
Cue Bloomberg:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0n7q0AGB_m4
"AIG wrote down the value of assets including credit-default swaps and commercial mortgage-backed securities by $25.9 billion and had costs of about $6.9 billion tied to repaying the government in the quarter. The firm also took a charge of about $21 billion related to taxes."
Got that, 26 yards of mark-to-market losses, 7 yards of interest payable for Bail-out 1.0 and 2.0, and 21 yards of unpaid tax.
Remember that AIG's latest bail-out check came in at around 30 yards. So basically, a check from Uncle Sam to help AIG pay Uncle Sam. Bernie Madoff, eat your heart out.
This, folks, is the AIG story. It is not that AIG has been bankrupted by claims due to CDS counterparties. In fact AIG, in the normal course of business, is a net receiver a cash from counterparties, and for as long as AIG remains a going concern, it will remain a thoroughly cash rich business. Why it has been crippled is because of the expected defaults attached to the credit crunch and recession - AIG is perceived not to be taking in enough cash to cover the predicted level of claims.
AIG, for several years, has been doing the equivalent of building a giant bond portfolio, and then lazily sat around clipping the coupons and thinking it was running a state-of-art, smart-as-fuck trading operation. (And to be fair, they weren't alone.)
When market turned, and people started to ask the true value of these assets/positions, that's when the true delinquency of the firm came to light - and the bald reality that it was dreadfully unprepared for a rainy day.
AIG might previously have been seen as the insurer of last resort for the financial industry, and now they are effectively a front for the Treasury which has taken on the role of insurer of last resort.
The Geithner strategy - and this is not an endorsement of it - I believe is that he thinks by keeping AIG afloat, he will contain the number of events of default which would result in AIG running out of money. So I think he sees himself as trying to break a self-reinforcing cycle.
What I don't find credible however is that AIG's bail-outs just funnel through to its counterparties. Neither the numbers reported by AIG, nor AIG's business model, suggest this is the case. As I see it, Geithner is signalling to the market that AIG will be able to pay out on its contractual obligations if they fall due. What he's hoping is that by doing this, fewer claims will crystallize.
March 12, 2009 8:14 AM | Reply | Permalink
good comment Eddie! But what the hell are AIG doing paying 21 bn in tax? They should be posting 'earnings' on their tax position with all the rest of their losses like most other financials, shouldn't they?
This bit, however,
"But it does not automatically follow that because AAAs provided relatively cheaper protection, they were underpricing credit risk - because they were AAA-rated, they had to post less collateral, so they could offer cheaper protection."
doesn't make much sense to me. Yes, they can write more CDS because of their rating. But there would also be more demand for their CDS BECAUSE OF THEIR RATING. If I can buy credit insurance from either AIG or joe-shmoe, I'll pay more for the AIG stuff, because I have greater expectations about their ability to pay out.
March 12, 2009 9:50 AM | Reply | Permalink
My guess is these were historic tax liabilities. But yep, pretty extraordinary.
Re. the AAA rating - you can construct a technical (i.e. supply-demand) argument as to why AIG protection should have been more expensive. But in the go-go days of easy credit, AIG, even with their top rating, still had to compete in price with firms that had AAA (monolines) or AA (banks) ratings.
But whichever way you look at it, it is a pretty circular - and ultimately disastrous - argument.
March 12, 2009 10:12 AM | Reply | Permalink
"AIG wrote down the value of assets including credit-default swaps"
When is CDS an asset instead of a liability?
If AIG is the "insurer" (counterparty) why would it need to write down the value of the CDS? If it is the "insured" and the insurance defaulted, then it might have to write something down.
March 12, 2009 1:01 PM | Reply | Permalink
When is CDS an asset instead of a liability?
When you have sold protection, the buyer of protection, your counterparty, pays you a regular premium.
So CDS behave like an asset that pays a regular income stream. Until there's a credit event, then the payments "swap". And the seller of protection pays out the cash settlement amount due to the buyer.
So as the probability of default increases, the market value of the bought protection increases. And vice versa re. sold protection - which is why AIG has suffered such gigantic losses, because they were huge sellers of protection.
March 12, 2009 1:34 PM | Reply | Permalink
Why would AIG as the insurER be writing down its CDS holdings as assets? Isn't that like looking only at half the balance sheet? There is a liability there too, the CDS is a liability. When I pay for insurance, my insurance company holds me as a liability, and it puts my premium payments into assets.
AIG has to put up collateral if the covered item's risk changes against AIG, but how does that amount to writing down assets which are truly liabilities which are increasing? Maybe it's just a semantic point I don't get. AIG as insurer keeps getting premium payments for the duration of the contract unless the insured party cancels the policy. Is that what "write down" means here?
March 12, 2009 1:57 PM | Reply | Permalink
I wonder if the problem is that Insurance must maintain a reserve by law, but the CDSs were not regulated at all so they didn't have to keep reserves on hand. That way they were able to consider the swaps as assets without a liability component.
March 12, 2009 5:11 PM | Reply | Permalink
My feeling is that in the end AIG will become the Lincoln Savings or the Enron of these late noughties' financial disaster -- not so much for what AIG did but as an exemplar of how the PTB went about saving the global financial system.
My sense is that when the history is written Geithner and Bernanke (Obama, Bush and Paulson less so) will be remembered for overseeing the looting of the financial system (post-July 2007). They will defend themselves claiming that they saw the crisis as one of illiquidity and that standard financial theory called for them to shovel money into large, illiquid institutions. They will lose the argument and be characterized as men who misjudged the situation and applied the wrong solution.
The financial system suffers from a crisis of insolvency together with one of moral hazard stemming from the free hand Geithner and Bernanke are giving insolvent institutions -- a free hand to gamble taxpayer money in the hope 1) that the firms can get lucky and 2) that their executives can continue to receive their bonuses. For the recipients of taxpayer money there is no downside under Geithner and Bernanke's ministrations.
We should be demanding that these institutions be audited and stress tested using non-proprietary, unbiased valuation models. Neither is being proposed. Insolvent institutions should be taken over with equity wiped out and unsecured creditors getting the little that the FDIA allows.
Finally, Geithner and Bernanke will defend themselves by claiming that they were handing the money out in order to prevent a 1930s-style collapse in the money supply. Perhaps that argument will have traction, but it's the way they're handing the money out and to whom they're giving it which should and will be criticized.
From a social and as importantly, a moral aspect we should be demanding that the money go not to the original defalcators but directly to the people themselves.
March 12, 2009 8:34 AM | Reply | Permalink
"We should be demanding that these institutions be audited and stress tested using non-proprietary, unbiased valuation models. Neither is being proposed. Insolvent institutions should be taken over with equity wiped out and unsecured creditors getting the little that the FDIA allows."
- We should be demanding WHO do this, exactly?! That's where my anger really burns helplessly. There's no government entity with the competence to do this. The SEC has been utterly hollowed out, and made dependent on banks' models and estimates.
You can't wipe out stakeholders without some decent proof their company is insolvent, and regulators are now dependent on the bank telling them whether they're solvent or not. It's pathetic and frustrating...
March 12, 2009 11:21 AM | Reply | Permalink
great posts Ellen.
March 12, 2009 1:38 PM | Reply | Permalink
Ellen and all,
In a rush, but I really think Leonhardt's latest article on looting is germane to this conversation:
http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?_r=1&em
March 12, 2009 2:26 PM | Reply | Permalink
Great link, Saladin. When the pols are PART of the game, and use foreign relations to help their cause, is that best termed "moral hazard?" I would think it adds a new level to the re-regulate debate when both finance and government are playing the same game. I mean, we ARE 18 months in, and I'm not sure I'm seeing a truckload of re-regulating happen.
And is "moral hazard" an adequate term to capture that? I donno. Maybe Ellen does.
March 12, 2009 3:29 PM | Reply | Permalink
"looting" is very much like "crooks and gamblers"
But Leonhardt misses a big point, that homeowners ripped off investors to the tune of $1T/yr. So it's not just pols and big business playing games, tho' if big business was flipping houses then that much was part of the ripooff.
March 12, 2009 5:03 PM | Reply | Permalink
Jesus eds, you often make some interesting points and as I've told you before I think your underlying point about the 1 T a year is important. But frankly I am sick to death of you're continued righteous blasting of home owners.
Homeowners didn't tell the appraisers how much their houses were worth. They didn't flood the market with too much cash, 1% interest rates, and zero oversight. They took what the market gave them. They acted like they were wealthy because the market and everybody else told them they were. So did most of our ideological leaders and pundits (Greenspan). And guess what all those remodeling home flippers actually improved neighborhoods- its how cities are revitalized.
They spent money and it pumped up the whole economy, so what? Homeowners weren't the experts with the historical data on tulip bulbs. It wasn't their job to make sure everything worked and they sure as shit didn't pull down hundreds of millions of dollars a year in impossible to trace deals that became so castrophicaly large they are now backed by my taxes. And despite Obama's meager plan nobody is bailing out most of us who are upside down.
You can say they took advantage of the times, and yes a few were crooks, thats life. But it takes two to tango and to brush everybody who bought or refinanced a home in the last two decades as a thief is either asinine, jealously spiteful, or just looking for a reaction. You are pretty damn bright guy so I am going to assume the latter (congrats mission accomplished).
But please in the future leave me out of your upper middle class versus lower middle class class war. My grip is with the bastards who are walking away with the cash.
March 12, 2009 7:41 PM | Reply | Permalink
What phrase do you think would be more appropriate in a compact macro sense (I'm not saying all homeowners and I'm not calling for prosecutions...)?
Homeowners take out loans and spend cash.
Homeowners don't pay back the loans.
Looks like a ripoff of investors to me.
You can blame the invisible hand of the bubble machine if you believe in such things. Maybe I just think there's too much whining about the Big Bad Banks around here and not enough attention paid to the flip side. Thanks for showing that someone noticed my born-again moralist plaint!
March 13, 2009 4:55 AM | Reply | Permalink
I’m not only enraged, I’m outraged! (Well, at least somewhat annoyed). Good post, Ellen. I wish I understood half of it. Boilerplate disclaimer: I don’t know a “mezz tranche” from a put from a pig. But wasn't the FDIC supposed to be doing stress tests of banks and insurance all along? And weren’t there strict leverage requirements that got watered down? I want a Truth and Reconciliation Commission.
AIG is mainly an insurer (and I thought the CDS’s were designed as fake instruments, specifically not insurance, so that they could be hidden from the balance sheets). If so, isn’t the bulk of AIG a valuable business? And could they not spin off their insolvent financial business (the insurance that’s not insurance) and not drag down the whole company and everyone else with them?
Regulators in the wild, wild west were hired guns working for the big boys. It just seems that pulling "expertise" from the financial sector to regulate the financial sector is a bit too incestuous. I think Bernanke is one of the few from academia, instead of Wall Street, but he seems to be a friend of the court, if nothing else.
PS I understand prosecutors are saying that Madoff made off with something like $170 billion, now, instead of the $50 originally thought. If so, does that put him into the “too big to fail” bracket? Some of these institutions may be too big to fail, but are their CEOs and CFos too big to jail?
March 12, 2009 5:31 PM | Reply | Permalink
If so, let's cut them down to size. Clawback time?
(sharpens pitchfork)
March 12, 2009 8:14 PM | Reply | Permalink
Naw, don't sharpen your pitchfork Bwak. A dull one hurts more!
March 12, 2009 11:35 PM | Reply | Permalink
What a blog and what great comments. I just got up and right now I cannot add much to Q's modified rage. Saladin, Sleepin and Seashell know what they are talkin about. Seashell always surprises me.
I never met Eddie-George, but wow.
You should lead a panel on CSPAN and bring all these people with you!!!! Your blog is young, I shall return.
March 12, 2009 8:37 AM | Reply | Permalink
This is a great post, Ellen, and great comments! I have my weird coping mechanism with the rage that involves continually asking 'what should we do about it?'. Though it doesn't always work...
So should we stop bailing out counter-parties? It takes a real pair of cohones to do, given no one really knows the knock-on effects of doing so.
But there's a prior question: ARE we bailing out AIG's counter-parties? I'm not so sure, though I haven't really been following. The first set of loans was super-senior - meaning AIG creditors were first in line doing the bailing out. All the feds are doing is smoothing the process. Is it different with the second batch? I know the conditions changed. But with the interest coming back, and the price fetched eventually on spin-offs, I think the AIG situation won't be a net loss for the government. Feel free to slap me down on this....
March 12, 2009 9:58 AM | Reply | Permalink
AIG is presumably paying off some parties. But some of the money injected is to keep AIG afloat as it "writes down assets" to lower prices, which changes the balance sheet. So some of the money, as with the "banks" is just going on to the balance sheets to keep AIG above capital minumums.
I wonder if AIG itself took out CDS with some other "insurer" to protect itself, whether in the sense of "laying off bets" or in another sense.
March 12, 2009 4:55 PM | Reply | Permalink
Stephen Zarlenga at the American Monetary Institute has a great plan. Dennis Kucinich has talked about it on the floor of the House. If we get enough letters to the Congress and media so that it is talked about, we at least can get beyond the rage that average Americans now feel. Here's a link and check out the brief history of our monetary system. Zarlenga has been on Thom Hartman's show and mine. He is NOT a conspiracy theorist. This theory comes from the Chicago Plan of the 1930s before U of Chicago was taken over by, in Zarlenga's words "the dark side". American Monetary Institute
I know that The Daily Show audience may be sophisticated, but on the now famous CNBC put down last Wednesday that continued every night this week, the crowd booed most loudly on the card with the AIG bailout. Then later Jon Stewart said to his guest "Aren't we paying them twice? So the word is filtering down to the people.
So the time to hang a few of them as Bill Maher suggests is now. Then put the Fed under Treasury and put the making of money under Treasury. Then hire competent bankers to run it. But with a new clear mission as Glen Ford recommends on blackagendareport.com and Zarlenga who says you have to have a two pronged approach. The new mission is to rebuild an economy that works for people. And the very first thing should be a down payment to all Americans who are sacrificing by being unemployed and who have already paid with their taxes the sins of the gamblers and warmongers. A national health care plan and a national pension plan that delivers a decent retirement should be implemented ASAP. That will tap down the rage because we will get something tangible.
But as long as Geithner, Bernanke, and Summers aka Rubinomics aka smiley faced fascism is in charge, it ain't gonna happen.
So back to papering Congress and the White House and having a huge anti- Wall Street rally in NYC. Waddayathink?
March 12, 2009 11:50 AM | Reply | Permalink
And here I was just wondering when you'd contribute a post on finance. Thanks for explaining and voicing.
Think about Bernie Madoff's bulletproof vest.
March 12, 2009 12:32 PM | Reply | Permalink
Is there a consensus forming here? If so, would someone mind communicating it in an even simpler way?
March 12, 2009 1:08 PM | Reply | Permalink
Nice to see you start a discussion, Ellen. What about the angle of foreign debt? I've begun to hear more suspicion that the current approach is just as political as it is economic (if those things can truly be separated at all). Your thoughts on on how foreign creditors play into this?
March 12, 2009 1:34 PM | Reply | Permalink
Hey DF. I find it mind-blowing that the international angle is so little-discussed. $3 trillion borrowed from countries the US ran huge trade deficits with - $1-$2 trillion just from China? They had $500+ billion in Fannie & Freddie alone.
But in July '07 they - and others - dumped $50-$60 billion of Agency bonds in one month, moving into T-Bills because they were more explicitly Gov't backed. So when the shit hit, who was Paulson calling? Hello China. We'll "do whatever is necessary" to protect those F&F investments.
But what the hell would we expect when we're running Guns AND Butter, the Bush League Sequel? $700 billion a year, year on year, as a trade deficit? Hell, it was Guns & Butter & SUV's & Cheap Mortgages. Nuts.
So my question is what if instead of talking about sneaky bankers running scams & counting on Government to bail them out... what if the Government had explicit discussions with the foreign investors, and the bankers involved, and promised them they'd be safe? Naw, couldn't see Bush's guys having discussions tying politics into finance like that.
Oh yeah. Geithner speaks fluent Mandarin. Good thing?
March 12, 2009 2:58 PM | Reply | Permalink
I just wish I had thought to short AIG myself. More power to them for hedging.
March 12, 2009 1:36 PM | Reply | Permalink
I think if the counterparties thought they could have got away with it (done it secretly) then puts were probably purchased on AIG by the counterparties. On the assumption the counterparties concluded if puts were bought that would become known the counterparties might have held off on buying puts as buying puts would gum up the bailout of AIG precluding a pay off to the couterparties. The ethics of buying puts on AIG being, of course, of no concern at any time to the couterparites.
March 12, 2009 2:27 PM | Reply | Permalink
Looking back at your post, Ellen, you say that the counterparties didn't predict a government bailout. There would be no reason for secrecy then in the buying of puts and there should be some record then.
March 12, 2009 2:32 PM | Reply | Permalink
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March 12, 2009 3:12 PM | Reply | Permalink
Next time, either write your own blog, or post a comment on a blog that is related to your subject matter.
March 12, 2009 4:48 PM | Reply | Permalink
It seems that democracy is turning quite formal for the most. Who's got the power uses it for solving his problems leaving for the others good slogans.
March 12, 2009 6:07 PM | Reply | Permalink
I was wondering about this quote from the Morgenstern piece
"Of the $302 billion in insurance outstanding at A.I.G., about $235 billion was sold to foreign banks and covers prime home mortgages and corporate loans. The banks that bought this insurance did so to reduce the money they must set aside for regulatory capital requirements."
Are regulatory capital requirements their payments to FDIC?
March 12, 2009 6:14 PM | Reply | Permalink
Simplistically, if a regulated bank acquires an asset, it can loan some multiple of the value of that asset to borrowers. The regulators set that "multiple" depending upon the riskiness of the "acquired asset."
Say the bank buys an ABS rated Baa; it might be able to loan 5 times the value. But an ABS rated Aaa might allow it to loan 10 times the value.
Buying from a sound seller a CDS "insuring" the value of the Baa ABS could convert that asset into Aaa. And the bank could, then, loan out more money.
N.B. Don't forget; banks create money out of thin air -- an infinite amount. The only limits to this "Ponzi" scheme? Finding enough borrowers and being unable to convince regulators and the bank's risk assessment department to raise the leverage ratios.
March 12, 2009 8:30 PM | Reply | Permalink
"N.B. Don't forget; banks create money out of thin air -- an infinite amount."
Debunked already and you know it.
BTW, was AIG also doing Private Mortgage Insurance or reinsurance of PMI? There must be a lot of losses in that field, AIG or otherwise. Used to be that low down required PMI. Many of the late bubble loans would likely have been of that kind.
So, who's been paying out on PMI claims and how does that relate to insured MBS etc?
March 13, 2009 5:01 AM | Reply | Permalink
Yes, but... separate desks.
It's more like the stock prop desk at Goldman got one over on the CDS desk at Goldman. Yes, Goldman wins in the end, but that's why Goldman has both those desks and thousands of others.
Which is why, if we want the last laugh we should cut off AIG and let Goldman's CDS desk bring their whole ship down. Fact is, we'd survive the loss of both.
The issue here isn't that Goldman did anything wrong. It's that we were wrong to bail out AIG.
March 12, 2009 9:43 PM | Reply | Permalink
Goldman? Down?
Will not compute. Must not compute.
Error. Error. Ackgnppncubwyvt v s
...
March 12, 2009 9:53 PM | Reply | Permalink
I'm outraged, but not for the same reasons you are. I'm outraged that AIG was allowed to LEGALLY offer credit default swaps without fully capitalizing their risk. But let's be clear here: AIG did nothing illegal. There's plenty of reason for outrage, but directing it at AIG is pointing your gun in the wrong direction.
March 21, 2009 4:05 PM | Reply | Permalink
My baby boy just got his SS#, kinda looks like a bill.Economies breath in and out, not a bad thing at all. This reminds me of our forestry practices out in the West where we protected the timber interests at all costs with fire suppression and a cute bear with a brimmed hat.The result is a massive tinderbox where in a healthy forest occasional lightning strikes allow for fire to sweep through and clean it out.I'm thinking about investing in Fiskars, manufacturers of fine high quality pitchforks made in the good ole US and A.
March 22, 2009 5:43 PM | Reply | Permalink
"But that means they've already profited from those puts and shorts. They're being paid twice."
Ellen, Jesus. Have you ever risked a buck on an investment? You sound like a total neophyte (or perhaps the word is pollyanna). Get with the program, baby. It's called capitalism, and you don't need a license to play. Do you want to come over to my place an naked wrestle sometime? I seriously believe it would clear up some issues for you. I'm not joking, Ellen. EVOO can be a lot of fun.
March 22, 2009 11:05 PM | Reply | Permalink