March 05, 2009
Josh Asks Why Geithner Doesn't Tell
Josh Marshall wants to know why Secretary Geithner can not tell us who the beneficiaries of the AIG bailout are.
We are now several month into this and some people still do not 'get it'. I'll try to give a slow but simple answer to Josh's question.
AIG signed insurances against bond defaults in form of Credit Default Swaps in a notional value of more than $450 billion. Some insured bonds defaulted and AIG paid out for these insurances. As it did not have the money to do so, the Bush and Obama administrations decided that the taxpayer should pay.
Up to November $150 billion were given to AIG and on Monday another $30 billion. But AIG still has $300 billion of CDS exposure and will likely make more high losses on that.
When Lehman Brothers went bankrupt -a 'credit event' - people who had insured their holdings of Lehman bonds asked their insurers to pay for their losses. Such a credit event was also triggered when Fannie and Freddie were taken into receivership.
AIG which had written insurances for the debt of those entities faced a big payout and the taxpayer had to cough up the money.
What is the moral justification for this?
It was morally okay because the people and institutions insured by AIG were justified to expected the payout as their 'assets', i.e. Lehman bonds had really lost value. They had hedged a real risk like you do when you pay for fire insurance on your house. Insured you are right to expect a payout when your house burns down.
But their is another group of people and institution who got money from the taxpayer through AIG.
This second group never ever owned a Lehman or Freddie or Fannie bond. But they also had bought insurance from AIG against the default of these bonds. These people never invested in 'assets'. They payed a small monthly fee to AIG for a lottery slip and when Lehman failed they had a huge win. They went to AIG, pointed to the 'credit event' and demanded the payout. AIG obliged and the taxpayer gave the money.
Some may ask:
"While it is easy to understand the moral case for bailing out real bondholders that insured against default, what is the moral case for paying out to people who made pure bets? These people never owned a fire insured house at all. Why do they get taxpayer money when my house burns down?"
"If they had be given back the money they payed for the lottery slips, i.e. the small monthly insurance premium, that would probably be understandable, but why do the taxpayers pay out the lottery win when the private lottery organizer is bankrupt?"
Simple answer to those simple questions: Because the administration says so.
There are big numbers behind this.
In an FT Insight column Satyajit Das gives us some:
Lehman Brothers defaulted with around $600bn in debt implying a maximum loss to creditors of that amount. In addition, according to market estimates, there were CDS contracts of around $400bn-$500bn where Lehmans was the reference entity. Market estimates suggest only about $150bn of the CDS contracts were hedges. The remaining $250bn-$350bn of CDS contracts were not hedging underlying debt.
To pick that apart:
Of a total of $600 billion real bonds owned by lots of people only $150 billion were credit insured. When Lehman bonds defaulted, owners of $450 billion of its debt lost all their money.
Owners of $150 billion of that debt did not lose any money. They were payed out the insurance they had contracted and the insurers (backed by the taxpayers) carried the loss.
The total economic loss was $600 billion, $450 billion by bond owners and $150 billion by insurances. $600 million left the monetary system - poof.
But on top of that there were written insurances with a notional value of $250-$350 billion that insured people who never had the insured asset but were only playing the lottery. These people demanded money from the insurer and indeed they were payed.
This part of the 'event' did not have a real economic loss. No money left the system.
Instead money was payed from the insurer toward the insurance holder, the buyers of CDS'. As the insurer was backed by the taxpayer every one and his/her children now pays for the enormous lottery win for a few people, who had risked very little. This is money that is moving from the bottom of the society to the top in unprecedented amounts.
What is the moral justification for this?
There is none.
Who are those people who are getting huge payouts from the taxpayer for risking little?
We know of one likely beneficiary, John A. Paulson of Paulson&Co Inc, a hedge fund that in November gave a party for his partners and employees:
Dinner? Jumbo crabmeat & avocado, paired with 1999 Haut-Brion; and Colorado rack of lamb with tarragon jus and parmesan polenta cake, paired with 1999 Chateau Margaux and 1999 Lafite-Rothschild (which can fetch more than $500 a bottle).
Paulson's company had made lots of profits as it bought insurances (i.e.lottery tickets) for the event that mortgage bonds would fall in value.
Paulson & Co. can surely afford the luxury. The $36.1 billion hedge fund famously racked up billions of dollars in profit by betting against subprime mortgages. ... The firm’s event arbitrage funds, with $19.1 billion in assets under management, are up more than 19 percent for the year in the unleveraged fund and 30 percent on Paulson Advantage Plus, which is levered 1.5 times.
Investors to Paulson's fund must bring at least $10 million to be allowed entry. Those are rich people. They now feast on the money every taxpayer is pressed by the administration to come up with.
Earlier Josh Marshall at TPM wondered where the taxpayer money goes. Secretary Geithner did not answer the question when he was asked by Senator Cantwell. Now Josh proposes a compromise and only wants to asks Geithner for the reason why they can not tell us.
Dear Josh the reason is simple.
AIG still has $300 billion in CDS exposure. If the Lehman quote of 1/3 real insurance and 2/3 lottery bets is the same with those CDS, which is likely, than a few rich people are waiting for a $200 billion free payout from the taxpayer.
Geithner does not want you or anyone else to know who profits from this scheme without having risked any real money. His rich friends do not want you to know that they are racking in billions of dollars in lottery wins that cost them little money and that the taxpayers are paying out because the private lottery operator went bust. They will pay off Geithner when his job is done and he finally gets kicked out.
People in the known and within the business are not likely to explain this. Satyajit Das, who has an MBA and is a risk consultant and author of lots of books about derivatives. He gave the Lehman numbers above. But his next sentence following the above quoted ones is:
The losses on these CDS contracts [i.e. the lottery part] are additional to the $600bn.
Of course they are NOT. These are not losses. No money from those bets is leaving the monetary system. This is money moving from many persons at the bottom to very few at the top.
Geithner and his masters fear that if the public knew or understood that, they would probably only get the costs of the lottery slip disbursed - if at all.
They want the big one. AIG has still $300 billion at risk that you and your kids will have to pay for.
They want it. And they are getting it. And there is nothing you can do about that.
Posted by b on March 5, 2009 at 01:10 PM | Permalink
So the recipients are of the domestic variety. There was speculation that European banks were being kept alive by this money, hence the secrecy. Thank you.
Milo's long gold position blew up and treasuries are pathetic. But there is a sleeper trade in unroasted, green coffee beans. And where there are green beans, there be hot-air popcorn poppers. Hedge it with Monterey sticky gold and Oreos.
Posted by: vachon | Mar 5, 2009 1:28:56 PM | 1
Posted by: slothrop | Mar 5, 2009 1:32:10 PM | 2
Posted by: Tangerine | Mar 5, 2009 1:40:20 PM | 3
So the recipients are of the domestic variety. There was speculation that European banks were being kept alive by this money, hence the secrecy. Thank you.
I did not say that. People with REAL money have no nation. The may run it through Deutsche, UBS or Goldman, who cares?
Posted by: b | Mar 5, 2009 1:51:41 PM | 4
People with REAL money have no nation. The may run it through Deutsche, UBS or Goldman, who cares?
Hold that thought, b!
Posted by: slothrop | Mar 5, 2009 2:05:53 PM | 5
so, b, am I correct in assuming this post was originally titled "Numbers that do not fit"? Just sorting out your reference in the Funhouse thread.
Talk about a funhouse, house of cards, castle in the air, numbers that do not fit any notion of human sensibility....silently screaming.
Posted by: catlady | Mar 5, 2009 2:30:15 PM | 6
With the media bankrolled by the high rollers, a clear explanation of the scam will never broadcast. It is not just future taxes, but the current value in homes and pensions that are being transferred to the short betters. It is not just the American middle class being screwed. Burmese textile workers are laid off in Thailand broke with no way to return home. They don't have the money to pay smugglers to cross back over the border.
No wonder, Tim Geitner looks frightened. Pitchforks and torches could be the new symbols of deregulated globalization.
A regulated economy, like peace, doesn't allow profiteers to skim off the wealth from the rest of us.
Posted by: VietnamVet | Mar 5, 2009 2:35:04 PM | 7
This is money that is moving from the bottom of the society to the top in unprecedented amounts.
big sink hole
Posted by: annie | Mar 5, 2009 2:35:31 PM | 8
mp3 of michael hudson on kpfa's guns & butter program thursday march 4
"The Way We Were and What We Are Becoming" with financial economist and historian, Dr. Michael Hudson
We begin with an analysis of the continuing bailout of insurance giant AIG and Monday's stock market selloff; price and debt deflation; the two sectors of the economy; two definitions of 'free markets'; the classical economists; revolution from the right and the former Soviet states; the threat of war; IMF/World Bank resurgence; the dollar versus the euro; analogies to Rome, neo-feudalism.
Posted by: b real | Mar 5, 2009 2:56:38 PM | 9
It may be the case that a sizable chuck of the bailout money is going into Euro banks that made the stupid mistake of being overly invested in our debt-laden banks. But given that China is far and away the single largest holder of US debt, we can't afford (literally) to piss off China. So I think that it's more the case that bailout dollars are being funneled into China's wealth-sovereign funds.
This may also explain why we continue to look the other way as China continues to violate US-led sanctions against Iran. And apparently we don't view Russia as an economic lifeline for us, otherwise we wouldn't be continuing to put the screws on this once cold-war rival of ours for failing to abide by these sanctions.
But every time I look into Geithner's eyes, I see something more sinister at play here... I, for one, see him as someone who's concerned about saving his bank buddies and their brain-dead banks than saving our economy as a whole. So I think that he'll continue to hand over huge wads of cash to US banksters even when it becomes abundantly clear that this is doing next to nothing to get our economy back on track.
Posted by: Cynthia | Mar 5, 2009 3:15:05 PM | 10
so it would have been a lot cheaper to save Lehmann in the first place? Who was responsable for that? It was a classic case of what not to do.
Posted by: outsider | Mar 5, 2009 3:17:15 PM | 11
@catlady - @5 - so, b, am I correct in assuming this post was originally titled "Numbers that do not fit"? yep - I saved that as a draft this morning but changed the perspective and title of the piece late in the afternoon today.
@Cyntio - @10 This may also explain why we continue to look the other way as China continues to violate US-led sanctions against Iran.
Could you please explain where and how China violates US-led (what does that mean?) sanctions against Iran?
I am not aware of any information that would allow such a conclusion.
Could you please post some links or news that would support your assertion?
Posted by: b | Mar 5, 2009 3:31:16 PM | 12
Good point about the trans-nationality of Really Big Money. I get so provincial sometimes.
Posted by: vachon | Mar 5, 2009 3:43:02 PM | 14
@outsider - so it would have been a lot cheaper to save Lehmann in the first place? Who was responsable for that?
You still do not get it at all.
The whole thing is not about what's cheaper but how do I make the most money out of it.
The Lehman bust made, as explained in my post above, some folks about 200-300bn in cash without having invested much more than a million or two. Did anyone of those people thought of how to make the bust "cheaper" for them - sure they did. If they could have gotten $200bn for a $1 investment they would have taken it.
I am devastate that otherwise intelligent people like you do not get this yet.
IT WAS A SCAM. Lehman was made to go bust because some people made A WHOLE LOT OF MONEY from the Lehman bust - not millions - hundreds of billons!
They "insured" themselves against the bust, then arranged it and the taxpayers paid the "insured" sum. What is so hard to understand with that?
From the taxpayer view there was never ANY need to pay anything at all. Those really insured against losses of assets they owned might have a moral case - might!!!
Those "insured" and never owned the "insured" asset never had a justifiable case to get anything from their bet.
The later make up for two thirds of what the taxpayer is paying out.
Why are the taxpayers, we and our children, paying for these?
"Saving Lehman" was never an option. The setup was clear for anyone who could read the market.
The question was and is how to save the taxpayer from taking the losses others take as profits.
I presented ideas for that here half a year ago linked top-left at the homepage.
Posted by: b | Mar 5, 2009 3:54:28 PM | 15
My bad, b.:~( I wrongly assumed that the US has been pushing the entire world, not just Europe, but China as well, to impose sanctions against Iran.
Posted by: Cynthia | Mar 5, 2009 4:08:04 PM | 16
But don't pick on Paulson. Considering the timing of his best returns, Paulson made most of his money not off credit events and payouts but by transferring the CDSs on to panicked latecomers. It's these hapless dimbulbs who are demanding that taxpayers honor AIG's fraudulent bets, and in a just world they would of course be stiffed. Paulson said somewhere he had closed out the CDS trades and clearly he's moved on, buying distressed assets from the patsies he scalped in 07. If you're going to blame someone for this looting spree, don't blame the guy who saw it coming, blame the stupid shits who bought worthless mortgage securities and then bought worthless insurance on them. Paulson merely played a teeny tiny role in the salutary process of price discovery.
Posted by: ...---... | Mar 5, 2009 4:21:39 PM | 17
So slothrop, because psychopathic avarice has been globalized the concept of empire is nulified?
What about clan loyalty, nationalism, and capitalistic accumulation of the resources necessary to implement imperial goals on a global scale?
Or do I just not get it at all?
Posted by: Juannie | Mar 5, 2009 5:25:10 PM | 18
I recommend b real's link at #9, interview with Michael Hudson on Guns and Butter. I need to listen again.
Welcome to the new feudalism. What time is it, kids? Time for the Dark Ages!
Posted by: catlady | Mar 5, 2009 5:38:04 PM | 19
b - I love ya - always great posts.
But sometimes you have misspells, grammar mistakes and other language errors which really detract from your super-great works.
Watupwidat? Anything I/we can do to help?
Posted by: Darkcloud | Mar 5, 2009 6:33:44 PM | 20
sometimes questions are best :-)) and I do like wikipedia
"On Saturday September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets. Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company."
Yes, Lehmann was intentional.
Posted by: outsider | Mar 5, 2009 7:01:16 PM | 21
Is AIG settling these contracts 100%? I had a distinct impression but no facts to back it up that they were going to negotiate the payout down through the process called novation.
There is another Paulson you left out of this story. The former Treasury Secretary and then his old firm Goldman Sachs. GS was widely reported to have taken big bets against the mortgage market in later or 07 and early 08 and for that the premier if not the only vehicle available in decent size were CDS's.
In the end this is the biggest story of all. GS has privatized the Treasury to some degree, in some sense. GS is in the process of taking the Treasury down. Make no mistake about this. Not that such is likely but I can foresee the day when GS paper will yield less than Treasuries. When they will have the power that JP Morgan had, or more.
Watch GS stock closely. On a relative strength basis it's the king of the financial sector. Yes it is hurting but far less than all the other giants. It leads virtually every single index to the upside on 1 minute charts when there is a bounce, and lags to the downside. It seems to be, seems only I admit, the safe haven of choice by stock players. With good reason. It's inside the Treasury. GS knows who is getting every penny of the AIG CDS' money, besides themselves of course. They know what Geithner is going to do before Geithner even knows it.
Posted by: rapier | Mar 5, 2009 7:08:41 PM | 22
and this is Robert Reich:
Worse: When it turns out that people like Lloyd Blankfein, the CEO of Goldman Sachs, who took home $68 million in 1997, was the only Wall Streeter in a meeting last September at the New York Federal Reserve to discuss the initial AIG bailout with "Tim Geithner, then New York Fed chair, among others, at the very time Goldman was AIG's largest trading partner, a distinct scent of self-dealing begins to emanate. When it turns out that Citigroup got a bailout deal last October far more generous than that given to any other distressed bank, when a top Citi executive was advising the Treasury and Fed, the scent increases. Goldman's past CEO was Treasury Secretary at that time, by the way, and another former Goldman's CEO was a top Citi official and also a former Treasury Secretary. I am not suggesting anything so crude as corruption. But could it be, given these tangled webs, that -- innocently, unintentionally, perhaps even subconsciously -- the entire bailout effort was premised on saving these companies rather than protecting the public? Or that the distinction between the two was lost, and still is?"
Posted by: outsider | Mar 5, 2009 7:09:21 PM | 23
this may not be too far off from the old scam where a couple (both healthy & usually newly married) buy a life-insurance policy and a few months later, one of them dies under "tragic" circumstances or simply disappears. And its really not that hard to "obtain" a death certificate from Macao, Zanzibar or Slovenia, it just has to look sufficiently official & your cheque is in the mail.
my question is if AIG finds it "reasonable" to underwrite insurance against corporate insolvency to third-parties, should'nt thay also make it possible for total strangers to pick up life-insurance policies on any random insurable individual ?
Posted by: jony_b_cool | Mar 5, 2009 8:34:49 PM | 25
I agree, juannie, there's more to social pathology than economics, but the material reproduction of life is basic to the kinds of social relations like nationalism, racism, sexism, classism.
This post is great because it nearly honestly acknowledges the global scale & scope of the capitalist mode of production.
I say "nearly" because the post suggests the "scam" is an aberration of capitalist planning. This crisis in no aberration, but rather an inevitable response by capital to a decreasing ability to extract more value out of labor.
Posted by: slothrop | Mar 5, 2009 8:58:42 PM | 26
One thing's for sure. This is an exciting time to be a leftist.
Posted by: slothrop | Mar 5, 2009 9:05:17 PM | 27
When two or more people collaborate in pursuing their self-interest in intelligent ways, what could it be called other than a conspiracy? Or are you saying that people never collaborate out of self-interest?
Posted by: jeff65 | Mar 5, 2009 9:42:35 PM | 28
@Darkcloud @20 b - I love ya - always great posts.
But sometimes you have misspells, grammar mistakes and other language errors which really detract from your super-great works.
Watupwidat? Anything I/we can do to help?
send corrections by email (about page) or post them in the comments - maybe I'll learn English one day or the other.
Posted by: b | Mar 6, 2009 12:43:14 AM | 29
The U.S. sanctions against Iran are specifically aimed at hampering the "western" expansion of Iran's economy, so to speak.
The U.S. is trying to keep Iran from realizing its impending resurrection on the global political stage (Persia! Persia! Persia Again!), and the primary aim of the sanctions is really to try and "flip" Iran's trade preferences from an Asian orientation to a Western one.
That, however, carries with it an implicit relationship between the political and economic elite and everyone else -- or, in other words, it means a significant cultural restructuring that probably ain't gonna happen without violence.
It's a stupid move. It requires regime change; otherwise, the only thing the sanctions do is push Iran harder towards China.
Because the U.S. is so blinded by their idealized colonialist legacy -- you name it, it's there: history, economics, political science, whatever -- they simply cannot envision the effort failing.
It will, of course, fail. Iran is Iraq on steroids, and if push comes to shove, China and Russia will be happy to be for Iran what Iran has been for Iraq. No matter what the U.S. does, the end result will be an Iran with an Asian orientation.
Oh, and P.S. --
The Chinese don't even know who "the Jews" are, and couldn't care less whether or not Israel exists.
Posted by: china_hand2 | Mar 6, 2009 1:01:05 AM | 30
@30 ...the only thing the sanctions do is push Iran harder towards China.
an appropriate couplet might go something like this:
the east long ago, and the east once again
as the west throws a tantrum in its playpen
Posted by: Lizard | Mar 6, 2009 1:33:25 AM | 31
...twirling and twisting and squirming with cries
and bullying all with its obsession for "mine".
Posted by: china_hand2 | Mar 6, 2009 2:28:26 AM | 32
Simon Johnson: Confusion, Tunneling, And Looting
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
This is the prospect now faced by the United States.
Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized. And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.” The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.
Confusion in policy breeds disorder in companies, and disorder leads to the loss of value. This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment. And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.
The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.
The road to economic hell is paved with good intentions and bad banks.
Posted by: b | Mar 6, 2009 4:16:14 AM | 34
On looting, I liked Simon Johnson's way of putting it.
Is it really that far from the looting of Baghdad in 2003? Except that it is looting on a much larger scale. Empty shells are all you can expect.
Posted by: Alex | Mar 6, 2009 5:06:37 AM | 35
The government actions are directly lengthening the downturn because they are refusing to restore 'confidence in the system', which is the stated goal.
Confidence cannot be had while the same people are in control doing the same things as got us here, but that is how Tim Geithner has chosen to play it.
Someday, books will be written...
Posted by: wally | Mar 6, 2009 10:04:19 AM | 36
I failed Economy 101 (was neo classical, never showed up for the exam.)
Economy, the dismal science, is not a Science. Whatever general rules, principles, or esoteric ‘quant’ formulae it can spew forth rely on to many parameters being held steady, none of them hold in real life, as human actors are motivated by too many imponderables. It is pixie dust, Power Point obfuscation, indoctrination. That’s the easy bit.
So, Economy Studies has become a handmaiden to power, its theories only to serve that or that overlord, thereby saving its skin. In the US (and other places) that works, economists and think-thanks are paid directly by those in power to churn out ‘theories’ or ‘principles’, just slogans really, to convince the masses that they should behave in x way, or that y principle is a golden tool. (See IMF, etc.) Hitler, the communists, the US Gvmt, they have all done the same thing.
For ex. the ‘supply side’ BS in the US in the past 20 years is a con and a fantasy. Rich ppl having more money (e.g. tax cuts) never led to investment in viable businesses or even faint trickle down.
Posted by: Tangerine | Mar 6, 2009 1:05:10 PM | 37
Hall of fame post here, b.
Posted by: slothrop | Mar 6, 2009 2:15:40 PM | 38
I'd cut him a break.
Posted by: china_hand2 | Mar 6, 2009 2:46:27 PM | 39
No, I mean it. Great post.
Posted by: slothrop | Mar 6, 2009 2:53:10 PM | 40
More mosquito-infested, stinking, sunken holes:
Posted by: biklett | Mar 6, 2009 3:40:09 PM | 41
I don't suppose anyone here would know the answer to this question but perhaps someone might point me to a place where it could be answered.
From what I understand of the Madoff affair, some people made a considerable amount of money using his "illegal" ponzi scheme. Is it not true that money gained from illegal activity is not yours to keep? If a bank robber gives you the money he stole from the bank, can you keep it?
Why is it then in this case, that taxpayers have to pay those players who lost money to Madoff? Would it not be logical that those who made money illegally reimburse those who were ripped off?
Posted by: dan of steele | Mar 6, 2009 3:58:47 PM | 42
Dan of Steele,
I think the money will try to be recovered. I haven't heard that the taxpayers are bailing this guy out. But this is mostly an assumption on my part, I could easily be wrong on this. I heard on the news that his wife is claiming quite a large sum that is in her name and is not part of the ponzi claim.
Posted by: Rick | Mar 6, 2009 4:25:00 PM | 43
@DoS - @42 - unfortunately it seems to unprovable for the public that someone profited from the Madoff scheme. He will now make a deal, a guilty plea, and in the end take the secrets down with him into his grave.
Sure some did profit. I assume he "washed" illicit money.
Did the taxpayer bail out anyone who "invested" with him? I haven't seen anything that suggests that.
Posted by: b | Mar 6, 2009 4:27:24 PM | 44
@b, as with any Ponzi the ones who get in first make money, and lots of it. The suckers at the end when it all collapses get nothing. I was not referring to money laundering but to the apparent illegality of what Madoff was doing, he was arrested for doing something wrong.
Taxpayers will help the investors in the form of the Securities Investor Protection Corporation
Posted by: dan of steele | Mar 6, 2009 4:53:15 PM | 45
i came across this today in my promenade through the pages
Dans une société fondée sur le pouvoir de l'argent, tandis que quelques poignées de riches ne savent être que des parasites, il ne peut y avoir de "liberté", réelle et véritable.
Vladimir Ilitch Oulianov, dit Lénine - 1870-1924 - L’Organisation du parti et la Littérature du parti
which loosely translate tell us - that in a society founded on the power of money, where only elites know how to be nothing other parasites, it is not possible to have a liberty that is real & material
Posted by: remembereringgiap | Mar 6, 2009 6:02:26 PM | 46
Dan of Steele,
Wouldn't there be civil complaints against Madoff? I would think some who lost money could sue to get their money back.
Posted by: Rick | Mar 6, 2009 7:29:46 PM | 47
Partial list leaked on Friday evening:
Posted by: biklett | Mar 6, 2009 9:08:04 PM | 48
Sorry for the long post, but couldn't get this comment from “American Patriot” singled out in a link from this article. Many of the other comments are good also. Again, as b has been stating, these derivative contracts should be declared null and void. If you need a laugh, be sure and look at the sample derivative contract from ABN AMRO in the link inside the quote below. If anyone says that they fully understand such a contract, they are either nuts or a liar or both.
Derivatives are complex contracts that bet on future events and for which the seller of the contract is paid a premium or recurring premiums by the buyer in exchange for the promise that the seller will pay the buyer should a described event occur. The common feature of a derivative is that it is not a claim on actual assets or commodities. A CDS (Credit Default Swap) is a typical form of derivative and there are about $62 trillion in nominal (face) value of these outstanding. Derivatives are used for hedging, speculation, and arbitrage. There are private, OTC (Over-The-Counter), and Exchange-Traded Derivatives and they are used for 1) futures and forwards, 2) options (puts/calls), and 3) swaps, among other dubious "financial innovations."
When you buy a derivative you are buying a contract that is similar to an insurance policy. Unlike a futures contract in which you agree to pay a certain price for future delivery of gold, corn, or whatever, nothing is ever delivered in a derivatives contract - except a payment from the seller of the contract to the buyer should the contract described event happen such as the default of a particular bond. Derivatives are essentially just highly speculative bets that are not secured by anything tangible and this is what makes then so dangerous and volatile - especially in highly volatile markets.
The Wikipedia definition of Derivatives is as follows:
"Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options, and swaps.
The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs."
The single biggest problem with derivatives is that most all derivatives contracts are UNLISTED PRIVATE CONTRACTS BETWEEN COUNTERPARTIES and there is thus no way to establish "market value" of derivatives. They are not trades on exchanges and are essential subjectively valued "Level 3" assets that only have value if another party can be found to buy them. If derivatives were required to be STANDARDIZED AND LISTED ON OTC EXCHANGES they would not be such a danger to the economic system as there would be "market value" and they would become much more "fungible" like commodities (which are totally fungible) and there would be transparency.
If you really want to understand why derivatives are so impossible to value and so complex, try reading an actual sample derivatives contract:
ABD AGREEMENT OTC-DERIVATIVES
You will quickly see, even if you are an experience financial person or lawyer, why derivatives are so impossible to value because of their vast incomprehensible complexity with a "trigger" hinged on uncertain external financial events - and that is the most fundamental problem related to the whole $500 billion to $1 quadrillion nominal value derivatives nightmare.
The derivatives bubble is the single biggest credit bubble in the world with some estimates putting the total nominal amount of $1 quadrillion. By the most conservative BIS estimates it is well over $600 trillion. However, there is a huge difference between the actual amount of money involved in the derivatives misadventure and the "nominal" value which is like the face value on a life insurance policy. The actual money involved is more like the premiums paid on a term life insurance policy and is probably no more than 2% of the nominal value. Even at 2% that still means that there are over $12 trillion involved in the derivatives betting game. There is no question but that the derivatives gambling casino will go bust.
The best solution is to simply void all derivatives contracts and return the premiums paid on them and unwind the entire derivatives markets in its entirety. All it is financially is a betting parlor with best on which way indexes, or interest rates, or whatever will move. There is no financial value in such arrangements and all is does is to create vast risk of losses (in the guise of doing exactly the opposite by "hedging them") and this entire derivatives market worldwide should be unwound and shut down in an orderly fashion before it implodes or explodes.
The derivatives numbers are just NOMINAL numbers. Think of them like the total FACE SETTLEMENT AMOUNTS of all life insurance limits at an insurance company. The premiums paid for these derivatives (like the premiums paid for life insurance policies) is MUCH MUCH SMALLER, and the liklihood of them ever all settling out anywhere near the nominal value is very, very small. What should be reports is the PREMIUMS PAID FOR THESE DERIVATIVES which is a tiny fraction of their nominal settlement amounts.
The biggest issue with derivatives is that there are not reliable counterparties (sellers) to pay in the event a derivative triggers. By contrast, the life insurance industry is highly regulated and has a slew of actuaries to determine adequate reserves to ensure settlements can be made. That is categorically not the case with derivatives. Many sellers (investment banks and insurance companies such as AIG) sold these without taking settlement risk into account and without setting up reserves and making sure that premiums were adquate based on actuarial analysis.
Further, unlike life insurance policies where all policyholders do not typically die at once (possible with an epidemic or nuclear war, however), a whole lot of derivative contract SETTLEMENTS could be triggered at a single time. This is possible because many derivative contracts are duplicative of each other and bet on the risk of a particular default, for instance, and multiple counterparties would have to pay out simultaneous huge sums of money in the event of certain defaults of bonds of large companies.
Posted by: Rick | Mar 6, 2009 10:24:37 PM | 49
@Rick thanks - especially this: The best solution is to simply void all derivatives contracts and return the premiums paid on them and unwind the entire derivatives markets in its entirety.
Top U.S., European Banks Got $50 Billion in AIG Aid
The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.
Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.
Other counterparties according to WSJ:
Some banks that were paid by AIG after it was bailed out by the government
* Goldman Sachs
* Deutsche Bank
* Merrill Lynch
* Société Générale
* Royal Bank of Scotland
* Banco Santander
* Morgan Stanley
* Bank of America
* Lloyds Banking Group
Source: WSJ research
Back to the original article:
Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.
Which begs the question - if $50 billion went to other banks and AIG got $173 billion bailout, where is the rest of it?
Over 2/3d of the money is still unaccounted for. Who got that part? That's the real important question.
Other things to note:
Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.
Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.
AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.
The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.
Sounds like a chain of big bank bankruptcies coming along ...
Posted by: b | Mar 7, 2009 3:27:58 AM | 50
"Sounds like a chain of big bank bankruptcies coming along ..." judging by their stock performance this eek ,starting with Barclays.
Posted by: ziz | Mar 7, 2009 5:38:51 PM | 51
That's a lot of asian money too.
Well, maybe NZ can decouple.
Posted by: slothrop | Mar 7, 2009 6:22:03 PM | 52