AIG: The Main CDS Insurer for Greek Government Debt?

Seeking Alpha ^ | 1/22/10

[marshmallow]

Yves Smith and I received a tip at the weekend from a friend who reads the German press regularly about credit default swaps (CDS) on Greek government debt. Read Yves’ piece based on that article here. Below is mine.

Previously, I had mentioned the CDS exposure of the hapless German Landesbanks (banks owned by the individual German states or Länder – hence the term Landesbank). These same companies lost enormous amounts of money in the subprime meltdown – and apparently they have all sorts of other toxic exposure like Greek CDS still on the books.

So I find it interesting that the German daily Frankfurter Allgemeine is focussing instead on the AIG CDS connection to Greece. Here’s part of what they had to say (my translation from German original):

London investment bankers named the American insurer AIG as an additional seller of CDS. It had to be nationalised during the financial crisis, because it had sold default insurance on U.S. mortgage bonds. The burden would have led to the collapse of the once largest insurer in the world. Before the financial crisis, AIG is said to have insured a large amount of sovereign credit risk. If there is still a major insurance positions on Greece, then the American government would have a strong interest in preventing a default of the country.

Even if it just concerns market rumours with the Greek banks and AIG, the examples illustrate the weakness of the CDS market. The protection is sold by banks or insurers, which themselves have only limited capital resources. As a general rule, they also have a much lower credit rating than the countries whose default they are insuring. The insurance provided by CDS may turn out to have been a bubble.

[marshmallow]

Y'all ready to bail out Greece (by way of AIG) in the near future?

[misterrob]

Let AIG fail

The US tax payers will be rioting in the streets over this

[Vet_6780]

Beware the Black Swan

This is how wars get started

[rod1]

Let Wayne Rooney and Sir Alex bail out Greece.
Aren’t they AIG these days?

[Army Air Corps]

Previously, I had mentioned the CDS exposure of the hapless German Landesbanks (banks owned by the individual German states or Länder – hence the term Landesbank). These same companies lost enormous amounts of money in the subprime meltdown – and apparently they have all sorts of other toxic exposure like Greek CDS still on the books.

That's not good.

[Oldexpat]

We never should have paid 100% of the CDS’s issued by AIG.
Every buyer knew that AIG could not possibly pay off if there was a major downturn in the world economy and it would come.
Sorbain-Oxley was supposed to solve the off balance sheet obligations of companies. Plus..all these guys on both side of the transactions were the “smartest in the room” people. They knew these were impossible contracts to fulfill.

[silverleaf]

Greece would make a swell country club for the labor unions

[RobRoy]

For over two years I’ve expected this thing to end in a significant war. It requires a “reset”. It is really the only way out. This thing is just too big for governments, even ALL of them, to solve.

[parsifal]

I am moved by compassion for the poor Wall Street bankers and AIG employees who were forced by our government to write these swaps for Greece... (/s)

parsy, who is engaging is some revisionism

[cliff630]

Same Old--Same Old--Same Old--Same Old--Same Old-- I'm sure GS is in this the same way they were on the selling of those mtg packages to an unsuspecting public and then buying the CDS (credit default swaps to insure the mtg bundles they just sold. They surely peddled these greek bonds, then went to AIG and bought CDS on the greek bonds. Remember, Hank Paulsom pushed Bush for the one trillion bailout to save GM, but the real goal was to bail out AIG so they (AIG) could pay off GS who had bought CDS to cover the mtg bonds they had sold.

Personally, I don't see any valid reason to allow CDS. If one is leery about a bond, don't buy it. Remember, high risk goes with high return. If it is sovereign bond buy the currency or play with options on the currency.