Treasury Misunderstands Credit-Default Swaps and Taxpayers Foot the Bill (Treasury Understands Nil)

American Shareholders ^ | 7/6/10 | Jeremy Weltmer

[Andrea19]

...So, to demonstrate the differences between the two scenarios, one can trace each kind of deal. If Goldman Sachs owns a set of residential mortgages and wants to hedge its risk on those mortgages, it could purchase an insurance policy on which it pays over time, and if the mortgages default, it could redeem its contract that it had made with AIG. But, from Goldman Sachs’ position, if the mortgages lose most of their value but do not enter default, then its insurance policy is useless. Likewise, AIG makes the money parceled out over time and has little ability to predict the amount of insurance that would be purchased in the future. Plus, AIG must have immediate access to the full insured value in the event of emergency.

By contrast, a credit-default swap is sold upfront for a cash value, so both parties know precisely the cost of the deal for the time defined in the contract. In the meantime, Goldman does not have to worry about future costs to insure, and AIG can use the capital upfront to invest, leverage, and compound its value. Most significantly though, a CDS requires the issuer (AIG in this case) to post capital if the investment loses value...

[Andrea19]

"When the money keeps rolling in you don't ask questions..."

Help promote Conservative activism here & here & here & here

[ClearCase_guy]

The president thinks that there are 57 states, and no one is really sure if Arizona is on the border or not.

But don't sorry -- we're going in the right direction. Joe Biden told me so.

[Andrea19]

Must be a gig effing deal, right?

[givemELL]

Yup. Remember, Bernanke, Geithner, Paulson, Goldman Sachs invented credit derivatives and credit default swaps, so they do understand them well. They also understand and implement taxpayer accountability for any and all debts they create and issue, which means...ALL OF IT.

[org.whodat]

They have whore houses and Gambling in Nevada, that is where you should be allowed to Gamble with your own money, not money that belongs to depositors and that is insured by the government. And AIG needs to be sold off and closed.

[LomanBill]

[But, from Goldman Sachs’ position, if the mortgages lose most of their value but do not enter default, then its insurance policy is useless]

 

Also probably useless when a Judge pulls the curtain back on the Goldman fraud Wizards and tells them, and their bidness partners, to go get stuffed...

 

 

Complete document here.

 

Eat A$$Paper and Die?   If you do, you will.

 

Bon Appetit.

[Stultis]

Joseph Cassano, the man who led the division of AIG responsible for the mortgage trades, testified that “I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got.” [***snip***] Cassano asserted that when the Treasury took over, it paid the counterparties to the contracts whatever they deemed fitting to close them out. As Gensler had discussed earlier, the CDSs represent a market product with a value that markets assign, whereas insurance represents a banking product that has a very calculable value. Basically, the Treasury assumed that AIG misunderstood their own products and that those with the most to gain by overestimating the value of the contracts could best evaluate the situation. They might as well have handed Goldman Sachs a blank check and told them, “Figure it out yourselves.”

Sweet deal for Goldman Sachs. I'm sure it's purely coincidental that most of the Federal officials involved used to work there (and may well return in the future).

No. Really. It could be. It's genuinely hard to choose with this crowd between ignorant incompetence and corrupt cupidity.