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Guest Post: The Banks Were Profitable In January And February Thanks To… AIG

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Submitted by Tyler Durden, publisher of Zero Hedge

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

“AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria – rated at least AA- (if it fit these criteria all OK – as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction – wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks – the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever“.

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks – effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities – run a chart from say last September to current of say S&P 500 and Itraxx – credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman’s terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were 1) one-time in nature due to wholesale unwinds of AIG portfolios, 2) entirely at the expense of AIG, and thus taxpayers, 3) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, 4) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this “one time profit”, which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers’ money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

“This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances.”

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So – in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice.ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of “market quotations may be difficult to obtain” is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name or index easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.

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54 comments

  1. CTMM

    Um… this is surprising to whom, exactly?

    It’s been clear that AIG was a backdoor bailout to counter parties ever since their government funding exceeded their market cap.

    I’m still waiting to find out if anyone is going to do anything about it, or is the entire financial industry willing to bend over and think of the queen?

    Joe Sixpack is never going to understand or have a cohesive political impact on this process as long as the price of cable t.v. and McDonalds remains within purchasing reach.

  2. Anonymous

    Prima facie evidence of how American financial oligarchs control the government and manipulate the market. If anybody doubted Simon Johnson’s story in The Atlantic.

    Poor Rick Wagoner must be seething with rage because of how uneven the government response has been with respect to automakers compared to that toward mega-banks.
    Then again, how often does he have lunch with Geithner?

  3. jam

    Hey, just want to let you know you are doing a huge service exposing this type of abuse. I am a blue collar working stiff that keeps up on this kind of stuff so it is no surprise to me. Some of the folks that I am working with at these local trade-union jobs are absolutley getting creamed. Losing 50% of all of their retirement that they have contributed for up to 25 years plus.

  4. Anonymous

    Joe Sixpack is never going to understand or have a cohesive political impact on this process as long as the price of cable t.v. and McDonalds remains within purchasing reach.

    I’m sure the French nobility had a similarly dim view of the lower classes.

  5. alex black

    You asked for more gripping analogies than the Pontiac Aztek scam. I’ll try:

    My favorite brothel is enormous – publicly traded, in fact. It’s also backed by loans from sovereign wealth funds (China and OPEC are in heavy; European banks seem to have been suckered in to). Problem is, the Madame developed a serious gambling habit, and spent weekends in Vegas piling up hundreds of billions in markers – the casinos figured she was good for it – they know the heavyweights behind her. But she played at dozens of casinos, and got so deep in the red that there’s no way she can pay them off. Hundreds of billions of debt, and her only assets are her girls and oh, she has hundreds of billions owed to her – apparently she was letting johns with 520 FICO scores have sessions in exchange for iou’s, and they’re all starting to default. She’s in a squeeze, and going down (no pun intended).

    Her only out seems to be to go to her backers, but they’re infuriated that she gambled away their loans, and don’t want to throw good money after bad. Then someone has a brainstorm – all of these backers are also backing…. the United States Government! Without their purchase of Treasuries, the US Government would be as fucked as the Madame (again, no pun intended).

    So they all go to Geithner and Obama and say, “Let’s make a deal. You make us whole on our whorehouse bonds, and we’ll continue keeping your ass afloat.” It’s an offer the US can’t refuse, but they need a way to pay off the Madame’s gambling losses with taxpayer money, while keeping it in the dark. So they get the Health Department to declare that the whorehouse poses an STD risk, but “accidentally” insert a typo in the press release saying that the whorehouse poses a “systemic” risk, and therefore must be saved.

    But the public is leery of whorehouses, and not sure they want to subsidize them. So Geithner/Obama discover a secret back-channel to funnel the funds in. The bondholders remain whole, and for the moment, agree to continue funding the US Government. And the smoke and mirrors have confused and scared the taxpayers – they don’t know what “systemic risk” is exactly, but they’re pretty sure that antibiotics don’t cure it, so they’re placated, and go back to watching American Idol.

    Unlike you, Tyler, I, unfortunately, am NEVER rendered speechless. 8-)

  6. Anonymous

    And why is anyone surprised? Didn’t H. Paulson ask for immunity from prosecution when setting up all of this? Well he knew he was about to break the law some where… Is Mr. Timy protected from prosecution? Can the AG from NY find something to put these people in jail?

  7. just another cog

    Until the American public realizes the common link between politicians, the banks, and media, it will be status quo. We are their servants.

  8. FairEconomist

    And the piece de resistance is that we were paying the traders bonuses for losing us money.

  9. Waldo

    Watched Geithner talk this morning on “Meet The Press”.
    He was explaining the reason for bailing out the banks and how system risk was a killer to our financial system and during this confessional he used the word “complicated” to explain the workings in finance. I realized at that very moment that he was obfuscating and we the taxpayer are being scammed. Admittadly I was for the Paulson plan of rescuing Wall Street but I was naive to the scale of the unserviced mortgage debt.
    This $ put into the financial sector is gone. It has bought valuable time for depositers (my firm was at Citi – moved to Union Bank). These depositors would be very wise to transfer to a sound bank if you are deposited with Citi, BofA, Wells, and such

  10. Robert Wood

    Sorry, I’m highly intelligent and educated and pretty much feet-on-the-ground. Perhpas that’s why this doesn’t make any sense to me; it’s gibberish.

    Can I have the Janet and John version, please?

    BTW Who’s up for buying cars or shares from Government Motors?

  11. Robert Wood

    John Rosaveer, I just don’t understand how the Obama-ists can tell Waggoner to take a hike. What about the share-holders?

  12. lambert strether

    Some of your less financially literate readers (like me) would appreciate it if you extended the automobile dealership analogy to the ISDA part. Thanks!

  13. Anonymous

    Sorry, I’m highly intelligent and educated and pretty much feet-on-the-ground. Perhpas that’s why this doesn’t make any sense to me; it’s gibberish.

    Can I have the Janet and John version, please?

    —-

    It’s not too complicated; Tyler’s just using fancy terminology. AIG was closing out bundles of trades at bargain prices, so it was paying big money to counterparties on bundles of trades where AIG was in the hole. Sort of like an airline sitting on a bunch of leases and offering to pay its lessor huge money to terminate the leases early. Or a car dealer, pricing lots of cars significantly below market to clear out inventory.

    AIG was basically intentionally losing money, since the losses were on the taxpayer’s nickel. And Treasury was happy to have AIG do it because that funneled money to banks that are insolvent and need money to service their massive debt loads.

  14. MarketBlogic

    RE: “Robert Wood said…
    John Rosaveer, I just don’t understand how the Obama-ists can tell Waggoner to take a hike. What about the share-holders?”

    The government can’t tell Waggoner to take a hike. But GM will go under without a $10+ billion infusion ASAP with more likely needed after that. So, the government can very easily make the new financing contingent on Waggoner’s departure (which I think is long, long, long overdue my own self, regardless of the catalyst).

    I’d have to go back and check (and it’s not worth the time), but when the government gave GM the first $10+ billion infusion there were benchmarks the company was to have met by the end of March, and GM hasn’t met the benchmarks – which is no surprise but likely triggers provisions in the first investment agreement that gives the government the option of throwing Waggoner under the bus.

  15. dryfly

    Joe Sixpack is never going to understand or have a cohesive political impact on this process as long as the price of cable t.v. and McDonalds remains within purchasing reach.

    I’m sure the French nobility had a similarly dim view of the lower classes.

    Let them eat Big Macs…

  16. alex black

    I thought anonymous at 8:15 had the best Janet and John version. Unlike every other insolvent bank that is simply taken over by the FDIC, often giving bondholders a severe haircut, Citi et al are first extracting a massive fee from the taxpayers that will ultimately go to the bondholders (or the executives). Doesn’t get any simpler than that.

  17. Anonymous

    Here’s a wacky idea: why not just cancel all the debt?

    Disappear it. Make it gone. Agree that no one can pay any of their debts back and be done with it.

    It’s all just numbers in a ledger, right? Just erase the numbers.

  18. Michael Fiorillo

    Please don’t also forget that GM’s being kept on life support is contingent on further concessions by the UAW, who have already accepted a two-tier wage structure for future new hires, and is being jammed into accepting (worthless) stock in lieu of cash for the health care debacle they agreed to take over from the companies.

    Apparently some contracts are more sacred than others.

  19. Anonymous

    So every time banks clean up on liquidation sales it’s supposed to be fake money?

    Those CDO people are morons to begin with. The ones I know are rejects from the mortgage desks, and the mess they tend to leave behind is staggering. The other thing about CDO people I noticed, is they all lack attention to details, and all are big picture people. Then they leave, and what’s left after them is a bunch of spreadsheets and losses.

    To the point, it’s possible the banks made money on AIG liquidation trade. It was coming. But are the markets that bad without that trade? Mortgages recover, credit cards are hot, auto loans are trading, equities are cheap. So the banks made some money of AIG, can you blame them? How is the stocks trading at fractions of the book still are justified, because that liquidation profits are not real?? Why don’t you “source” tell you what hole those banks that are short equity swaps will be if they settle on the up side. In general, let them talk about equity swaps, and how they mark their books for them. You will love the story. It’s more fun then this CDO trade.

  20. Stuart

    To say the banks were profitable is like saying I feel fine except for this tumor in my brain. Lets just ignore that and keep thinking all is well. Delusional spin to wet the appetite of fools. Nothing more.

  21. Juan

    Robert Wood,

    ‘[T]he Janet and John version’ might also be the bigger picture version which, in shortest form, is simply to say state capture, i.e. that over a period government was effectively remade to serve the interests of a particular class segment [though some might prefer the word 'group'].

    Differently, as Jamie Galbraith put it in a 2006 article:

    Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

    ‘in full control of’ means making use of that control, which is exactly what we’ve seen taking place w/the whole alphabet soup of Plans — the details differ but the intent is the same..to, at any cost to ‘Janet and John’, reward failure and subsidize the financial.

  22. Anonymous

    @Anonymous 9:26pm :

    Indeed that is the right solution: cancel all debt, and life continues much unburdened. The Old Testament calls for a Jubilee every 50 years!

    But that would not suit their purposes. They want to preserve the banks, while keeping homeowners and credit card debtors chained to their debts. That’s good for productivity you know.

    This turmoil also provided good cover for other stuff while we’re distracted:

    http://www.whatdoesitmean.com/index1218.htm

  23. Anonymous

    I’m not even sure what to say.. I voted for this jerk Obama, and now I see he is nothing but a shill for all these bankers.. rarely have I felt this disgusted over all this bailout stuff. But this thievery is disgusting beyond words..

    I know people,just like everyone here and elsewhere, who are just average hardworking americans.. trying to earn a living.. didn’t get mixed up with any of this crap.. and now THEY HAVE TO PAY THE BILLS FOR MISTAKES THAT WERE NOT THEIRS????

    I have lost complete faith in the fairness of this system…I beleive in free markets, but for a market to be “free”, it has to be fair, and I guess I was naive enough to believe it was fair..

    I have lost all faith in Obama.. he is nothing but an extension of the Bush administration. At least Bush didn’t lie or pretend to be for the people.. and didn’t hide behind a telepromter. Obama is worse, much much worse than Bush.

    I trust neither political party..now I look back and see that at least Sarah Palin broke up the oil monopoly in Alaska.. at least she tried and sucessed in breaking up the corruption in Alaska.

    I just have no words for this theft, this is theft.. pure and simple.. from taxpayers to these people who made bad bets.. and this disgusting crime is being done with Obama’s blessing.. what a absolutely disgusting thing … they are all the same, doesnt matter who is in power…
    no one stands up for the little guy, and for Obama to lie boldface and stand by while there is this huge transfer of wealth from taxpayer to these companies.. there are no words.. just disgust!

    thank you ZH for bringing it to our attention!

  24. Charles Monneron

    Hold on a second ! I was under the impression that the main purpose of these super senior trades was to do regulatory arbitrage for the account of retail banks (super senior counter party weighting was 20% instead of 100% if kept naked) that were distributing the loans. If all these structures are unwound, Banks are going to require quite a bit of additional capital, especially in Europe. Where does this capital will come from ?

  25. killben

    This is just another example of the continuing rip-off of the dumb suckers (tax-payers)!!

    Unless the dumb suckers (tax payers) revolt they are going to be looted in the guise of helping the Main street!

    Welcome to the 21st century America!

    do you have what it takes to rip off tax payers in the guise of helping them? Then GET ON BOARD THE PONZI TRAIN!!

  26. Independent Accountant

    All:
    Welcome aboard. I’ve been writing about AIG’s “bankruptcy fraud” for months. Yes, it’s every bit as bad as you think. AIG was used to “launder” tens of billions to the Wall Street Mob. Imagine, you thought money laundering was a crime. Not if the Treasury Secretary and Fed Head do it for you. Sharpen up that guillotine. What would Lloyd Antoinette Blankfein say of this? “Let them eat credit default swaps”.

  27. Bo Peng

    If you agree with the (mainstream) thinking that AIG-FP cannot fail before it unwinds its CDS and CDOs, then asking them to dump the portfolios and giving them avenue to terminate the CDS en masse are the right thing to do.

    Problem is, I’m not convinced “orderly unwinding” is necessary at all. If anybody still hasn’t nailed their counterparty risk (to anyone else), then they deserve to die in misery in the fire of AIG collapse.

  28. aw70

    To chime in with Bo Peng…

    On the one hand, I understand the outrage about AIG serving as an opaque front end for yet another transfer of taxpayer money to the banks.

    However… there is this thing with the major banks being to big to fail, and all. Same for AIG. As much as we would all like to see these bastards fry, sending any of the major players into chapter 11 would really send the bits and pieces flying. Realistically, it is much better to try and slowly unwind the massive imbalances that have accumulated. This is neither fair nor pretty, but a reasonable case can be made for the view that having the major players fail outright would be even worse.

    Having said that – once you have decided to not let the major banks fail, is it then not pretty irrelevant how exactly, and by which means, the fall is being cushioned? The banks had (and still have) a lot of garbage on their books. This deal – while shady and nasty – allowed them to get rid of some of it. So if you consider the big picture – is this underhanded deal really such a bad thing? It had to be done somehow, so why not like this?

    Just wondering what you folks think of this view

    A.

  29. a

    “AIG was basically intentionally losing money…”

    Maybe I’m missing something here, but I thought one of the stated aims of the government was to wind down AIG’s books. In order to wind down the books, you have to trade with the original counterparties for the flip side of the original trade. There is *no other solution*. Given that, AIG *has* to go to the original counterparty and basically *has* to take the counterparty’s price on the deal. (If it traded with BOA a CDS on Ford, it can’t unwide this by trading with GS the same CDS on Ford, because it then would carry the risk that GS or BOA goes bankrupt.)

    The culprits in this affair are the fool public and Congress who wanted AIG wound down as quickly as possible. Once that decision was made, huge losses were inevitable.

  30. Fred

    this is no scam and nothing special at all, AIG is in process of liquidating positions and as a result of this they unwind unusually large positions onto their bank counterparties, these cps make abnormal returns because spreads are much wider than usual due to risk aversion – banks report better earnings in capital markets from these types of trades which is no surprise at all, they are not only making money out of AIG there will be millions of similar deals from funds etc who are in distress – this is why the banks have been reporting better earnings last several weeks, finally if the public money did not have to go to AIG they would have to go to the banks – the example above has just transferred public money needs from banks to AIG – i.e net nothing done as far as taxpayer is concerned – no more or less stuffed

  31. Anonymous

    aw70 said… “However… there is this thing with the major banks being to big to fail, and all. Same for AIG. As much as we would all like to see these bastards fry, sending any of the major players into chapter 11 would really send the bits and pieces flying. Realistically, it is much better to try and slowly unwind the massive imbalances that have accumulated. This is neither fair nor pretty, but a reasonable case can be made for the view that having the major players fail outright would be even worse.”

    Errrr … the “major players” are rapists, and they need to be eliminated …

    Fear Of “Bits And Pieces Flying”

    Take the pain fast or take the pain slow?
    Is this really what they need to know?
    The powerless victims argue their fate,
    All to the advantage of the rapists they hate …

    The central argument of this critical hour,
    Should instead be why they have no power?
    Its because they are afraid to let the bits and pieces fly!
    Its because they are afraid to make the rapists die!

    No balls! No brains! No Freedom!
    Join the masses, kick their asses!

    Deception is the strongest political force on the planet.

    i on the ball patriot

  32. Speechless

    Seems like it’s time we in this country realize that 1). We’ve let the free market system go way too far 2). Our govt. was in charge of regulating our banks etc. 3). We are responsible because the swindlers were in bed with the regulators and we all were lulled off to sleep, off into a state of false complacency, imagining that because it had always been alright it would all be alright in the near future.

    Well the sad fact is, the swindle happened on our watch and we now need to cover the losses. We the people are holding the bag and there’s not much in the bag at the moment.

    You were looking for images to describe the situation? At best, I say our economy is Schrodinger’s cat and this post is trying to let the cat out of the bag and say it’s dead.

  33. Anonymous

    Clearly the government is in right up to its bloody elbows.
    Systemic risk is one thing… but systemic corruption is what we really have.
    Now we know we cannot trust the government to reform the banks, because the two are too much interlinked.

  34. Sean Shepard

    Speechless -

    WHAT FREE MARKET?

    AIG can’t write all of those debt swaps and obligations if the government (via FED policy and tax code) wasn’t trying to force feed housing down everyone’s throat, whether they could afford it or not.

    Fannie Mae and Freddi Mac would have had their risks spread out amongst 100s of other companies without GSE status. Each with varying loan standards instead of government encouraged concentrated risk.

    Too much of or problem comes from government trying to find ways to gloat about statistics and having so many regulations in place as to make it too difficult for competitors to enter the marketplace effectively.

    There is a lot to this and unfortunately, BLOG comments can’t do it justice. I suggest reading “Meltdown” by Tom Woods.

  35. Anon1

    I had trouble reading and understanding the regular-language explanation as soon as “Pontiac Aztec” hit my eyes.

    Good crap, I cannot now get the picture of that monstrous…thing…out of my mind’s eye long enough to grok the rest of the explanation.

    The “Aztec”?!!! Couldn’t you have used a “Yugo” as an example instead of that…thing? The execs at Pontiac should be sent to Gitmo for permitting the Aztec from EVER getting approval for manufacture.

  36. billmon

    AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers . . .

    You had to figure this whole enterprise would eventually turn into the kind of scheme that Tony Soprano would love to muscle in on.

    The Mother of All Bust Outs

  37. Anonymous

    twixt/tween never-land of liminality

    caught in ground by
    financialized

    corporatisms

    drooling
    dripping
    jaws

    long-held cherished
    never admitted
    desires em
    merge

  38. curlydan

    there are a million solutions to this problem other than the “it has to happen this way or armageddon” comments that pop up here in every fifth comment.

    let bondholders hold the bag, cancel cds contracts, have a bank/financial institution holiday, create a database of cds contracts for anyone getting fed $$$ to show the effects of nationalization, RTC: The Sequel, etc.. there are a million things to do…the govt and wall street are just choosing the most opaque solution that requires the least congressional approval.

    under bankruptcy, an orderly unwind of these trades means each person gets a little bit of what they’re due, and each person gets a little pain as well. deal with it!

  39. Sean Shepard

    as curlydan notes above, there are indeed “a million” (perhaps a slight embellishment) ways to deal with things, but …

    some of them have long term debt and taxation consequences
    (ie: borrowing from future economic growth under the assumption that it will be so much better in the the future as to be able to sustain the hit)

    some of them are inflationary

    some of them are patently inappropriate or redistributionary.

    some of them pay off friends and those who have “access” first

    some of them have foreign policy implications related to (a) not only the investments in failing enterprises but (b) investments in U.S. Treasuries (Communist China has funded 10% of our outstanding debt alone and has surpassed Japan as the largest holder).

    Ultimately, the Austrians (ref: Austrian school of economics vs. Keynesian) have been pretty much right on target with not only the breakdown itself and the causes, but the appropriate way out. Too bad all of the government’s folks are Keynesians.

  40. Anonymous

    >> The "Aztec"?!!! Couldn't you have used a "Yugo" as an example instead of that…thing? The execs at Pontiac should be sent to Gitmo for permitting the Aztec from EVER getting approval for manufacture <<

    May I propose the Gremlin here? Can’t think of an uglier car.

    Vinny

  41. Anonymous

    It almost makes sense from a cynical perspective, but could a massive thievery of the US Treasury on this scale acutally be possible? I know the dominant media acts as BHO’s propaganda arm but really now, is there a historical comparison of such a theft?

    I’m a bit cynical about the cynicism here.

  42. Anonymous

    Jeez – could you do a little research or maybe, y’know, thinking, about things before you post your conspiratorial know-nothing nonsense about them? The ISDA Close-out Protocol has nothing to do with “CDS trade crosses”. It has to do with how a portfolio of OTC derivative trades (any kind of trades) is closed out on a counterparty’s default. And maybe AIG is “front and centre” because it comes early on in the alphabet. How can people take you seriously when you get things so wrong?

  43. Yves Smith

    Anon of 3:41,

    You accuse Tyler of distortion (and engage in a lot of unnecessary sneering, generally a sign of a weak argument) while engaging in a considerable amount yourself.

    The supposed CDS trade cross mis-labeling is a nit (and I am also told you are factually wrong here).

    You have said nothing to disprove the thrust of the argument, namely, that banks’ claims of Jan-Feb profits were misleading, since they were in large measure due to a one-off, AIG-related payments, not ongoing improvement in business conditions, as they implied, and that the change in ISDA procedures facilitated that.

    And if you look at the list that Tyler linked to, only a fairly small number of CDS market participants signed up and AIG is far and away the most prominent (no JP Morgan, Morgan Stanley, Goldman, Paribas, UBS, Deutsche).

    Persist in leaving snarky and substantively dubious comments and I will block your IP address. I welcome informed criticism, but name calling and distortions are another matter altogether.

  44. Anonymous

    Shouldn’t we burn someone(or many ) at the stake? That would be a worthwhile message to all that would destroy my children’s future. We have witnessed the end of this GREAT American Experiment. I fear now that not only will the world hate us(Americans) , we now deserve it. God help us because u know the Government has just destroyed us! At least I still have my guns.(Just not my house!)

  45. Anonymous

    Yves, re your response at 4:32 on April 4. I didn’t mean to sound snarky. Well, possibly a little but not as much as I did. Apologies for that. Anyway. I don’t have a view about the main argument, nor did I pretend to have one. My comment was about the frankly wrong assertion about the ISDA Close-out protocol – that it was somehow a conspiracy. Read the recommendations in the CRMPG III report from last summer for background to the need for the change that it makes. The protocol is still open and ISDA say it will be indefinitely, so people can sign up over time. It’s not like a CDS protocol that has a limited time to sign up.

    One point does puzzle me about Tyler’s argument. A protocol only changes a contract between two parties when both of them have signed up to it. As you point out, none of the other major CDS players have yet done so. So exactly how did the ISDA “change of procedure” facilitate AIG’s counterparties’ booking their artificial profits?

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