Thursday, March 5, 2009

AIG and naked CDS: Die already! DIE!

$150B later and AIG is still dead but we are still throwing good money after bad.

The biggest scam on earth is taking place under our very noses. It bests madoff and it is legit because we haven't outlawed it yet. AIG is dead because it underwrote (or at least re-insured) the insurance on naked CDS and when it blew up there is no budget that can cover such a DEMULTIPLIED BAD DEBT. The taxpayers are funding hedge fund jackals to the tune of $150Bn and have NOTHING TO SHOW FOR IT.

NAKED CDS MUST BE BANNED YESTERDAY. Even the guys who were speculating with it think so (find the conde nast article on "the death of wall street"). AIG must FAIL TODAY to STOP THE PAYMENTS TO THESE HIGHWAY ROBBERS. $150 fucking Billions to clowns like me, how many schools, how many hospitals, how many barrels of oil and you call this "innovation"?.

This is the kind of BULLSHIT that lead to outrage and the invention of communism in the late 19th. And to those of you that don't see this ABUSE and dribble that meak liberal line like sheep being taking to the slaughter house, you are really too fucking stupid to see it and you deserve to pay every fucking dollar for it.


TF said...

Right now AIG if often mentioned in German media because they insured the CBL contracts.

Roy Russo said...

I don't think there's anyone on the planet that can predict what happens with an AIG failure. Most Americans (me included) only knew of AIG as an insurance company handling retirement funds... evident by all the old people running around with a shit-eating grin in their TV commercials. As TF mentions, they touch every corner of the world - backing banks and other financial institutions. It looks to me that all roads lead to AIG.

The sensible thing may be to take it over. If the world financials really do depend on AIG, then the U.S. taking it would send a clear signal, imho.

Jean-Luc van Hulst said...

No wonder that you can make money on your bonds defaulting!

Nice to have CDS, sold by AIG guaranteed by Uncle Sam!

Marcf said...

TF, good link, yes they are everywhere as Roy says.

Roy, they already have nationalized AIG back in Sept. What they should do now is STOP PAYMENTS to naked CDS and speculators that Jean Luc talks about.

Jean Luc, it is shameful. Those that have the clothed CDS are behaving like pigs, those that have naked CDS are making a killing at the expense of taxpayers.


tom said...

I agree. Line them up. We can call it "for crimes against humanity". Later we can line up any one using investment instruments with four or more syllables in their name.

Tom also said...

I dont get it. How does owning that CDS (or owning a short position against a stock, for that matter) while indeed HOPING for further failure... how is that "ownership" able to influence that failure?

Jean-Luc van Hulst said...

Tom: From the article:

“Say you’ve lent $100 million to a company and you had bought $100 million in credit-default swaps,” said Henry Hu, a law professor at the University of Texas in Austin. “In that circumstance, the creditor really doesn’t care whether or not the company goes under.”

Following a meltdown last year in the relationship between prices on bonds and credit swaps after the Lehman Brothers Holdings Inc. bankruptcy, basis traders often stand to make the most money if companies default. They can also profit by holding the trade until the debt matures or unwinding the position after the market value gap between the bonds and derivatives closes.

Hedge-fund manager Citadel Investment Group LLC in Chicago and Frankfurt-based Deutsche Bank AG were among firms that piled into trades based on the spread between debt and swaps prices. Buying before the Lehman failure and the subsequent seizing up of the corporate bond market, many suffered losses and retreated.

So it's about making money, as far as I understand it on the price difference between the bond and the CDS?

Marcf said...

Jean Luc and Tom,

I think Tom was asking not so much "how do i make money here" rather than "where is the control". But both posts got me thinking.
1/ On the making money.
It is not entirely clear to me. Obvious ones in naked CDS are that the price of the CDS is going up. So you can resell your option at a premium. It is akin to buying a put seeing the markets go down and reselling your put, this is straight options trading. The spread between the bond and CDS is more obscure to me and the article didn't clarify for me, what I can fathom: Time 0: bond 100 and you buy a CDS. Time 10 bond 80. Selling your bond will lose you money, waiting for maturity or default will give you 100. But this doesn't involve a "spread" If one of you gets the "spread" thingy clearly please explain.

2/ Tom, good question. I can see two ways a/ Buying CDS increases the price of CDS and thus makes it more difficult for a entity to raise debt as the cost of insurance goes up. At some point the feedback loop creates a capital trap. But this is diffuse, not direct.
b/ I am pretty sure that in debt covenants there are clauses that require approval of bond holders on board restructuring plans. The article refers to bondholders only approving at 34% a restructuring plan that needed 75% to pass and effectively shooting down the plan. In this case the debtholders benefited from outright bankruptcy.

Shameful times.

Marcf said...


Boys and Girl, this man is called Marx and he will teach you how to spell speculators.

I am serious, a recent time this abuse became clear and caused a horrible debt-deflation depression was 1870 from what I read. It lead to Marx creating "Das Kapital" and the inverse abuse that was communism. Let's hope we have more wisdom to get out of this predicament, but somehow I doubt it (in related news: house bill to ask access for public to staff canteen and subsidized bank, like soup kitchen!)

Tom said...

I asked the author of the Bloomberg article (Shannon Harrington) about the use of the word "push" in her first sentence..."may be pushed..." and if indeed "push" was the correct word to use. She was kind enough to reply and here is her reply:

"the idea is that if a company needs to restructure its debt to stay out of bankruptcy (which requires convincing bondholders that it would be a better alternative to bankruptcy), too few of the bondholders will have the incentives to keep the company afloat, therefore they'll be pushed toward bankruptcy"

So my take is that the bond holders are the same guys that are buying the CDS (to protect their bond positions) and that if the cost of the CDS is going up, then their profit margins are going down... and they will then be reluctant to favor restructuring and resigned to taking their shrunken CDS based profit.

So..."A shrunken profit in the hand is better than a restructuring in the bush?"

Marcf said...


nice one on contacting the writer directly. Yes that is what I outlined in b/ in my post above, the way it works is a little different however.

If You have a covered CDS, you own the bond, and the price of CDS going up doesn't entice you to sell it (unlike naked CDS). If your bond is worth 80 on face value or in restructuring, then you are better off pushing for bankruptcy where payout is 100. Note that most CDS classify "restructuring" as default trigger so I am not sure this applies to every CDS out there but the few that do not classify restructuring as default.

Also I must say that while covered CDS can lead to the abuse outlined here it doesn't bother me much. I still view it as a valuable risk transfer mechanism. The one thing that I can see is that by concentrating risk on one entity like AIG, moral hazard may have distorted incentives by saying "AIG is too big to fail anyway, let's keep on underwriting bullshit". Which is EXACTLY what happened and is going on from a bailout standpoint.

However remember that naked to covered is 4 to 1, most people were speculating with the naked ones. While the naked ones do not come with any rights (like blocking a restructuring) they are deadly as they multiply bad debt by 4. 1 dose of bad debt was enough to cause 1870 and 1929. We got 4 times the dose and AIG is the conduit by which the bad debt is SUCKING THE LIVING LIFE OUT OF MARKETS AND INDUSTRY TO REWARD SPECULATORS. I am getting in touch with my inner Marx.

Juha Lindfors said...

The word from the oracle on BBC today was that Goldman Sachs has the most to lose if AIG defaults... it would be the first domino to fall.

Juha Lindfors said...

Jean-Luc van Hulst said...

Thinking about deleveraging, seems like everyone is deleveraging except for the governments!

And for the US, just to put it in perspective once more, look at the numbers. Compare Feb 2008 with Feb 2009:

Total US debt went from 9.35T to 10.88T (+1,53T) in just one year. And this is only the beginning. So with 2,4T lost in home values and well over 2T lost in the stock markets since then does it make sense for the government to suck up this much debt when everyone else is deleveraging?

Wasn't the idea of the bailouts to prevent at least some of that?

Here are the links for the gov. debt figures per month.

As you can see it's 'owned by the public' debt that has been growing, the 'real' debt so to say.

Staggering. Just from jan-09 to Feb-09 200B was added.

Jean-Luc Vanhulst said...

Fortune just published 'the list' or rather 'a' list of the companies bailed out behind AIG...

Roy Russo said...

"does it make sense for the government to suck up this much debt when everyone else is deleveraging?"

Yes, because we have the urgent need to build bridges and roads, and give everyone free health care.

You're not alone in pondering this. It's obvious investors are losing faith in the government's moves by how they're voting in the markets.

Marcf said...

Jean Luc,

I think it is a classic Keynes approach started by the previous administration and continued with gusto by the current, used by Bernanke from what he knows of the great depression.

Contrary to ideology the main driver of the great depression wasn't policy blunders (although they didn't help) it was debt driven deflation.

The FED is there to keep At the moment when the private sector is deleveraging, spend from the public sector to avoid a complete collapse of prices. Prices during the great depression dropped 10% a year on average for 4 years. That will make the debt burden heavier since your debt doesn't deflate.

Roy. The public votes at elections and the public voted. Obama won get over it. Markets deleverage because markets deleverage. 95% of the money velocity was the financial sector, that's gone. Monetary driven mayhem. The opinion of a few angry conservative counts as much as it did in the general election :)

Overall I am not hopeful that what the public authorities are doing is enough to stench the debt deflation going on. It helps, it is not negative, but it isn't enough imho.

Marcf said...

I can't write this morning. 3rd paragraph means to say "The FED role is price stability and in a debt deflation environment, the FED prints by taking on more debt that the private sector is shedding". Again it is semi-classic keynes. Monetary driven.

Anonymous said...

The S&P 500 is down ~30% since Obama started outlining his budget and spending plans (aka stimulus bill) in early January. The market has been voting ever since and they clearly don't like what they've seen. Perhaps they read "Atlas Shrugged" and don't like the real life version we're living now?


Roy Russo said...

"Roy. The public votes at elections and the public voted. Obama won get over it."

Well, it seems that same public is now eating cake. I have 4 years of waving my fist in the air, like an angry old man, to look forward to. ;-)

tom said...

"I have 4 years of waving my fist in the air, like an angry old man, to look forward to."

You say that as if it's a bad thing (tongue in cheek)
I've been doing that for the last 8 years. At first I couldn't tell if the heart attack would arrive before the stroke.

Good news is by now I've built up some stamina. Still, I'm hoping I won't have to keep it up for much longer - it gets old and quite distracting.

One outside hunch(?) I have is that as Obama pulls troops out of Iraq he demonstrates that he's keeping his campaign promises and THAT will eventually lead to cut backs on spending.

I do think that will help with the national wallet and global mood.
but, indeed, it won't cure the banking thing - but I dont think there's anything he can really do. Politically he's hung up by all the others guys in Washington. They all want their say so and they all want their camera time and they all want their chance to screw things up. And they will get it because he needs their support in order to do anything.

I'm wondering if... if... when Paulson first came before congress and said give me $800 billion, with no recriminations and I'll take care of everything...

I'm wondering if that could have worked - sort of like removing a single tumor before it metastasizes - because the alternative, as we've seen, is just another mutant congressional monster that doesn't really know what or how to do anything. Nothing with 500 some heads could know what or how to do anything.

Time to go. It's my turn to wave my fists in the air.

tom said...

lest we forget how this all started:

Army No. Va. said...

The banking crisis which is caused by the bursting of the real estate bubble was unavoidable. There is a lot more to come... we've only a couple/few million foreclosures done or in process or on hold. We've got 10 million more to come. 80-90% of the people more than 10% underwater on a $200K+ home will walk over the next 5 years.

Might as well let the zombie banks go under and let some newer ones grow and take over.

Obama is playing the FDR/Japanese game. Wall St knows what that looks like (Nikkei is now at 1982 levels). This year is looking a lot like 1931 except for two things: a better, more comprehensive safety net and the banking system is still kind of working and deposits have not dissappeared.

We'll pay for covering those deposits later with either govt taxes or the tax of inflation (most likely both). At some point Saudi Arabia, Iraq (after we leave), etc... demand gold or Yen or Yuan for oil, then we are really screwed, especially the very people Obama says he's trying to help.

That woman who was jumping for joy on YouTube about having Obama pay her mortgage and her gas? Well...he will - Section 8 McMansion with 8 people living in it (govt assigned roommates!) and public bus service. Not quite the change she voted for I bet!

Of course, we'd be playing a variation of this theme with McCain...except probably wouldn't have as many Section 8 McMansions (or maybe we would've anyway).

I'd be getting quite concerned and waving my fist in the air if the foreclosures started mounting in my neighborhood with the potential scenario described coming down the pike.