Posted on 10/06/2008 5:15:57 PM PDT by ventanax5
While it may look superficially similar to the recent implosions of such investment giants as Fannie Mae, Freddie Mac and Lehman, the takeover and bailout of AIG is quite different, and means that the market is entering the next and even more dangerous phase. What is driving the fall of AIG – and potential government losses that may far, far exceed the $85 billion bailout announced late on September 16th - is not mortgages or real estate (directly), but fears that AIG’s huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.
(Excerpt) Read more at financialsense.com ...
Money for nothing and your chicks for free....
I have been reading warnings about the perils of derivatives since they started. Looks like the chicken’s come home to roost.
How come Daniel R. Amerman understands credit derivatives, but the people at AIG didn’t?
I don’t have any reason to think this guy knows anything at all. I don’t think any of the highly-compensated ivy-league geniuses on Wall Street know anything either.
Note: this article is from Sept. 17th.
Because Daniel R. Amerman wasnt receiving huge bonuses by manipulating the models which down played the risks of the derivatives being managed.
Ahhh..., a very good article to read. It takes a while and you have to get your head wrapped around the subject matter — but — we’re all going to have a lot of time on our hands, being out of work and so on... LOL...
Looks like Manchester united will have a new jersey.
http://www.eufootball.biz/Sponsorship/0710086-Manchester-United-shirt-deal-AIG.html
Actually, I think this thing on CDS’s will be the smoking gun behind this whole worldwide mess. It was based on the notion that real estate had a very low loss rate, because of appreciation due to “housing shortages” and immigration. Historical loss ratios drove pricing, and those loses were nearly zilch.
CDS’s were the gun. The corrupt US Congress and the CRA was the ammunition.
In the end, we will all have to work much harder to bail out our own government, and the world. BHO will see to it.
First, you need to very seriously think about cutting your ownership of financial assets.
Won't that accelerate the failures of financial institutions?
Very interesting. Insurance gone completely out of the box, on numbers derived from very shakey formulas...
Because Daniel R. Amerman wasnt receiving huge bonuses by manipulating the models which down played the risks of the derivatives being managed.
I would add that I don't think everyone failed to understand or were fooled, these are well educated people. I think there was a tacit understanding that some risk was 'downplayed'. They merely chose to accept the risk models to allow them to continue business - and bonuses - as usual. Others saw the danger to all, and found it unacceptable to continue or not speak out, like Amerman.
Suppose I operate the following lottery: each week, I sell 20,000 tickets for $100 each. If the Friday evening drawing of the Illinois Pick-4 comes up with the number on the ticket, I pay out $1,200,000 (the Illinois Lottery pays 50%; I'm paying 120%). I don't tell anyone how many tickets I've sold. I also don't tell them (and somehow prevent them from finding out) that I've sold one ticket for each possible drawn number except one, for which I've sold 10,001.
Every week I'll pay out a winner, so people will have no reason to believe that I'm good for the wager. In addition, if someone wants to see my balance sheet to confirm that I've got a few tens of millions of dollars in assets and should have no problem covering their wager, I'll be more than happy to accommodate.
Any week my 10,001x number doesn't come up, I'll stand to make $800,000 from my lottery despite my offering 120% payoff odds. So every week until the big one hits I get to secret $800,000 in some overseas account. If my number does finally come up, no problem. I simply scram and let the 10,001 winners fight over a few tens of millions in assets while I have many more millions overseas.
When everything comes crashing down, should people say that my lottery failed because I didn't understand correlated risk?
IMHO, some of the CDS vendors knew full well about correlated risk. Scoop as many assets away from the company as possible (through salaries, offshore financial vehicles, etc.) knowing the correlated risk is going to hit sometime. Then when it does, welsh on all the bets and enjoy all the loot you collected before the crash.
I don't know why welshing on the bets is considered accidental. It's actually a sound strategy.
I agree. Knowing the risk will hit sometime, then plan (hope) on being out 'beforehand'. Kind of a 'Wall Street' (the 1987 movie) greed reborn with better math and technology. And bringing in all that money and earnings for the company, others who might have had cause to think better of it, tolerated it, because they and their company and investors still benefited after all the bonuses were paid. But for every fat cat like these there are/were plenty of others not earning nearly as much, not twisting the rules to fit their needs, dealing in the 'regular' markets, and now they are really screwed, because they don't have a windfall of 'earnings' stowed away. Just investor fear and mistrust and loss of portfolio value. The ripple effect is just beginning on this one. And I fear, like the Milkens and others of the 80's and 90's, most of these guys who played really fast and really loose will get a slap on the wrist and not even care as they have relax in the Hamptons...
As an aside, the remake of 'Wall Street' called 'Money Never Sleeps' about the underside of Wall Street, is due out in 2009.
If one of those people were to take a baseball bat to the kneecaps of the executives in the CDS division, I wouldn't fault them one iota. Nonetheless, even though not all of the employees of a company deserve to lose their jobs because of corruption in which they play no part, there's no legitimate basis for those employees to demand that anyone else pay for their misfortune. Though if they were to sell videos of the CDS executives being kneecapped, there might be plenty of people who would support them voluntarily.
Now if we see kneecapping videos surface, well, you’ll have to lawyer up to get your percentage! I can see where CDS employees might have no expectation of recompense. It’s sad that they’ve ruined it for so many others in similar businesses who followed the rules. It’s a cruel world, and only a small number of these executives achieve real personal wealth, all too often at the expense of others, including coworkers and support personnel. I guess it’s the same in many businesses, but more pronounced in the financials.
You're right - they knew exactly what they were doing. And, it's one of those events where, they would all say they they would do it all over agin if given the chance. It was the nature of the business and it drove incredible profits for a short period of time. As messed up as it sounds - it was an accepted business practice without any backstops.
Thanks. So sad but true. They can't wait to do it all over again, or get their chance. The rules were for the other guys, in other sectors. They are probably not waiting for a chance, but seeking to find a way. They are refining their plans and ideas for the future, much as the guys looked for new opportunities after the Milken years (hence, my reference to 'Wall Street'), encouraged by the fortunes made by those guys. Think Gekko's Greed speech. I would guess the best and brightest, and a few of the younger guys who didn't make their fortune - yet, are looking ahead to future opportunities after this 'plays out', and they will find a way to (once again) use any new rules to their advantage.
“I think there was a tacit understanding that some risk was ‘downplayed’.”
We have a winner. This is exactly what happened.
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