From FAZ,. Note the text below, translated by EuroSavant, replaces an earlier GoogleTranslate version. You can read an English version of the entire article here.
In the larger scheme of things, this example shows how AIG could have, and probably did, serve to channel funds from the public at large to speculators.
London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.
Even if these are mere rumors about the Greek banks and AIG, this example makes clear the weakness of CDS markets. This protection is sold by banks or insurers who themselves have access only to limited capital resources. They have as a rule clearly lesser credit-worthiness than the states for which they are selling insolvency protection. Insurance by CDS could turn out to be just a bubble.
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“The insurance provided by CDS may prove to be a bubble”
Ya think? Of course it might be more accurate to call it a Ponzi scheme. And “may prove to be”? At this late date is there any doubt?