OMG: AN HONEST MSM ARTICLE about AIG and credit default swaps....

[Junkdrawer]

The Case for Letting AIG Fail

....

Moreover, investors or banks holding credit default swaps do not necessarily own the tranches of mortgages or bonds that the CDSs insure. AIG may have even written multiple swaps over the same mortgages or bonds. It would be like an insurance company selling earthquake insurance on one single house to multiple investors. When the house falls, so does AIG.

...

Think again of the insured house. Many institutions hold insurance on the house; on the other side are insurance companies and the like making an opposite bet. If the house is destroyed, one group of institutions wins and the other group loses. Considering all institutions together, no money was truly lost — it's what economists call a zero-sum game. In good times, risk hungry banks loved this game, but now they have become risk averse, and the game seems to have changed. So how can many of the banks simultaneously claim enormous swap losses with no bank claiming significant profit?

Here are two possibilities: either the vast majority of all swaps — not just AIG's — are held by investment banks, or a significant portion is held by other financial institutions like hedge funds. Suppose all swaps are held by banks. Since swaps are a zero-sum game, the banking industry as a whole cannot lose money on swaps. Then there is no need for a bailout. (See TIME's "25 People to Blame For the Financial Collapse.")

Alternatively, if hedge funds hold significant positions, then it is possible for the banking industry as a whole to net a loss on swaps. That loss would be the hedge funds' gain. This means the bailout is ultimately saving the hedge funds.

...

http://www.time.com/time/business/article/0,8599,1885578,00.html?cnn=yes

Thought I'd never see the day....

[Junkdrawer]

1. Translation: Chances are REAL GOOD that the wealthiest of the wealthy are sucking money....

to the tune of hundreds of billions of dollars out of the banking system via this "crisis".

[DireStrike]

2. I'm reminded of Ned Flanders

"Oh, Ned won't buy insurance. He considers it a form of gambling."

Remember when The Simpsons was satirical?

[chimpymustgo]

3. "AIG is probably not too big to fail."

-snip-

Here are two possibilities: either the vast majority of all swaps — not just AIG's — are held by investment banks, or a significant portion is held by other financial institutions like hedge funds. Suppose all swaps are held by banks. Since swaps are a zero-sum game, the banking industry as a whole cannot lose money on swaps. Then there is no need for a bailout. (See TIME's "25 People to Blame For the Financial Collapse.")

Alternatively, if hedge funds hold significant positions, then it is possible for the banking industry as a whole to net a loss on swaps. That loss would be the hedge funds' gain. This means the bailout is ultimately saving the hedge funds.

Whichever it is, if the number of institutions involved in swap trading were limited to those trading with AIG, then no, AIG is probably not too big to fail. We have to worry about chains of claims. Just because AIG only dealt with banks does not mean that those banks did not rewrite similar contracts with hedge funds.

-snip-

Drain this swamp.

[Junkdrawer]

6. Thanks. That last paragraph is EXTREMELY important....

Just because we know the Goldman Sachs got the lion's share of AIG money, we DON'T KNOW YET where the money wound up. Goldman could be paying the hedge funds and expecting AIG to reimburse.

[muriel_volestrangler]

7. Possibly, what needed to be done was separate the real insurance business

from the credit default swap side, and then let the CDS stuff go bust. I imagine the bankruptcy of the traditional insurance business of AIG could have harmed a lot of non-financial customers.

[Bonhomme Richard]

4. Why not deny all claims for CDS's and, at best, only...

repay the premiums that they paid?

[rrneck]

5. The entire

bailout is still a huge exercise in risk dispersion. All of those crooks are still dancing around the chairs and making millions doing it.

We need to stop the fucking music and see who gets to sit down.

[chimpymustgo]

8. I'm with you. Barney Frank just said the government agreed not to limit what AIG does

in "covenants" that were signed (IOW, the bonuses were specifically protected). They're trying to make sure the "loans" are paid back. I think this strategy is terrible. Now the Congresscritters are scrambling to get in front of this. THey're SHOCKED, SHOCKED there's gambling...

[HamdenRice]

9. I agree completely and wrote about this days ago. Only settle "insurable risk"

The basic problem is that cds is a kind of insurance on a debt security, like a bond.

But because of Phil Gramm's loophole, you don't have to own the bond in order to buy insurance on it.

They could use state law to apply insurance principles. For example, I can insure MY car against theft or collision because I have an economic interest or insurable risk. I can't legally buy insurance on YOUR car because I have no economic stake or insurable risk, and under most state laws, my insurance on YOUR car would be considered therefore gambling.

Each cds that is presented for settlement should be presented with a bond or else no payment.

That said, there is an aspect of cds that make take care of this. Most cds require that you present the bond with the cds in order to claim payment. This actually creates a strong market in defaulted bonds! But it also means that if you can't find a defaulted bond, no soup for you. This problem may be self-limiting, and most cds may expire because of a shortage of defaulted bonds.

[chimpymustgo]

10. Where's the legislation to close Gramm's loophole?

[Junkdrawer]

11. Look up Kyle Bass... his hedge fund was up 600% after being paid off...

on non-mortgage-secured CDS bets....

He was featured in CNBC's House of Cards special:

http://www.cnbc.com/id/15840232?video=1029066462&play=1

[Junkdrawer]

12. Kick

:kick: