The Black Hole Gets Bigger: AIG Back for Yet Another Bailout

The Financial Times reports that AIG is up to its old tricks, back again to the trough for more money. Christmas The Iceland credit default swaps settlement is coming soon, you know.

The worst is that AIG is pretending to act as if this is a negotiation as opposed to extortion. Get a load of this crap:

AIG’s executives were on Friday night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

Ahem, are they trying to help the government by coming up with a fig leaf? Are they assuming that everyone forgot the terms of the original loan? From the Fed’s press release:

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

The “interests of taxpayers are protected bit” now looks like a complete joke. The original loan was ALREADY secured by ALL of AIG’s assets. Everything that could be hocked WAS ALREADY hocked. And the government has a 79.9% equity interest. So what is this talk of a debt for equity swap? The government doesn’t want to go over 79.9%, then it has to consolidate the operations on its balance sheet. And it has the right of first refusal on everything else (the fact that it has all the assets as security means they cannot be sold unless the proceeds are remitted to the Fed. The mechanics ought to be that AIG gets some sort of waiver in order to complete a sale, but I am certain somewhere the lawyers have a procedure in mind, since it was understood from the get-go that AIG would repay the loan via asset sales).

The idea of selling dodgy MBS to the Fed is also ludicrous, but that does not mean the Fed will not go ahead with it. Again, the Fed now has ALL of AIG’s assets as security. So it is going to increase what it lends to AIG, since AIG really has the upper hand, and AIG is offering the ruse of pledging the MBS because other banks have used MBS as collateral for loans, and version 1.0 of the TARP was to have banks sell crappy MBS to Treasury. So AIG presumably hopes that the Fed will gamble that the generally inattentive public at large will think this latest move resembles other bank rescue activities and therefore will not make angry calls to Congressmen. But this is all a ruse.

This is the essence of AIG’s latest proposal:

Man walks into pawn broker. He says to the person behind the counter, “You know that watch I brought in two weeks ago? I know you lent me $85, but now I need another $50. And I will tell you why you will give it to me. I have a gun with me. I will blow my brains out here, right now. With your nice carpet, I guarantee it will cost you more than $50 to clean up your store. And that’s before we get into the cost of keeping your store closed while you clean my grey matter off your walls and what my suicide might do to your store’s reputation.”

Oh, and we forgot to mention that the man in the story above pulled the same trick last week and it worked like a charm.

The other bit that is offensive is (separately) that AIG is unhappy that it is paying more its bailout than banks did for theirs. The arrogance is breathtaking. Banks and securities firms are regulated by Federal agencies. The fact that they came close to going under says the oversight was defective, and one can argue that the government was required to prevent a disaster that happened on its watch.

The federal government has NO oversight over AIG. Its mess was SOLELY AIG’s own doing, and they should consider themselves incredibly lucky that they were so big that the Fed felt it has to intercede.

Now they think they are entitled to demand an improvement of terms? They should be told to take a long walk off a short pier (the management, that is). If we are merely going to salvage random about-to-fail-that-might-hurt-the-financial-markets players, I’d much rather rescue GM. They at least have a better attitude (and Obama made noises that he would demand better fuel efficiency as a quid pro quo). And I have far more sympathy for blue collar workers than AIG executives.

And if the interest really is too much for AIG on a current basis, no reduction in rate or debt-for-equity optics. Just lower the proportion that has to be paid in cash, and add the deferred interest to the principal. No free lunches here.

But then again, the Fed does not want brains and skull fragments all over its board room….

From the Financial Times:

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan…

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday…

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

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  1. eh

    Like I said before: the Fed asked for this.

    I noticed yesterday it was announced that Etrade will apply for TARP money. I think it’s pretty hard to make the case that Etrade is important enough as a financial institution, in the ‘too big to fail’ sense, to merit a taxpayer bailout. And it’s not like they don’t have attractive assets that would be interesting to a buyer (as has been rumored).

    But basically I expect more of the same, from both sides — i.e the Fed and the administration as well, offering even more programs that invite abuse.

  2. Steve

    AIG is due to report earnings before the bell Monday, meaning it will be downgraded before the close. So Ben is panicked, as he tends to be most every day of the week. Anyway, whatever happened to the `rapid’ sale of AIG business units to pay down the Fed line? Has AIG convinced Shaky Ben that a `firesale’ would result with oh just such worrisome implications for all that is good and holy? How about this: do the firesales and let the bondholders take it in the neck. AIG is the undead.

    eh mentioned E*Trade. The controlling shareholder and bondholder is Citadel, with all kinds of springing lien provisions. Citadel are big boys. Let them take their losses if the bank sub, with its ludicrous portfolio of seconds which JC Flowers called a `black hole’, gets put under the regulators. Citadel `saw value’. Bad call, you’re fucked.

  3. bg

    The problem I have with the riteous tone is that Lehman and AIG could easily have swapped places. We could have sunk AIG and saved Lehman and the result probably would have been even worse. Or maybe we could have half saved each (saw the baby in half) for the worst possible outcome.

    But once an underregulated too-big-to-fail P.O.S. gets nationalized or collapses, it is a messy business that is going to make the administration look foolish.

    The riteous indignation on the part of the management (in both cases) also looks bad – but is the only way forward for them too.

    Full nationalization of the part of the system we want to salvage was probably the right way forward, but that too would have been messy, as the global system is not under our control, but is highly interconnected.

  4. eh

    I fully agree that since the Fed decided to help AIG survive then asking why didn’t they didn’t do the same for LEH is legitimate. I think there is some truth in the FOH = Friends of Hank factor. But we will never really know the whole truth/story, and that is part of the problem.

  5. Richard Kline

    bg, we didn’t ‘nationalize’ AIG: that is exactly the problem. Paulson and Benny agreed to unlimited funding for AIG with zero control, and so of course they are enabling the blind theft of the public. I expect another 75 days of this under the present team. —And too likely years more of it under their replacements. Corporate fascism rests easy in these hands.

  6. thomas j

    The people who really should be grilled for this atrocious looting of taxpayer funds are the insureds making the collateral calls against AIG. Of course, the Fed refuses to publish their names or any payments made to said beneficiaries of taxpayer largesse. But who needs disclosure to know the names include JPM, GS, MS, DB etc.

    So called negotiations between AIG “management” and Fed officials are nothing but smoke and mirrors to avoid disclosure of the real criminals operating in the background.

  7. wintermute

    Could this be the start of Fed printing?

    AIG has no more assets to pledge for security – yet if it goes down it will bring on another bout of “cardiac arrest” / “systemic failure” which could undo all CB rescue efforts of the financial markets thus far.

    Solution. Bank-roll AIG with Fed-Funds by Treasuries which remain on the Fed balance sheet. Surely a few tens of billions of outright inflation can’t hurt in such a deflationary environment. Can it?
    Sooooooo tempting isn’t it Bernanke, Paulson… Soooo tempting…

    Now talk about Faustian pacts with the Devil!

  8. ruetheday

    There have been a lot of reports lately regarding how AIG has been borrowing heavily from the Fed’s new commercial paper facility and then using the funds they raise to pay off the $85 billion loan which was made on significantly unfavorable terms. My guess is that the Fed tried to put a stop to this nonsense, and then AIG said fine, but let’s renegotiate the terms of the original loan then.

    In any case, what needs to happen is an orderly liquidation. The government owns 79.9% of AIG, it’s time they exercised that power. Fire senior management. The individual insurance units are decent businesses by all accounts, well them off to other large insurers. When everything is sold except for the secret hedge fund they’d been running in their basement, then put together a plan for slowly unwinding that as well.

  9. patrick neid

    Come now everyone no gnashing of teeth. Until the old rule of thumb, 3x, is violated there’s nothing to see here. The original begging was $85billion, at $256 billion we can legitimately start complaining.

    While waiting for that number you would do well to contemplate why wiser old hands said “no plan” is the best “plan” when all the hobgoblins were trotted out a couple of months ago. Had Bernanke really been a student of history he would have known this.

  10. River

    Great catch Yves. The AIG mess is a good example of what happens when 1) avoidance of moral hazard is left out of the equation and 2) rediculous deregulation is allowed into the equation.

    Insurance companies, no matter their size, are supposed to be regulated by the various states, not the federal government. The parties responsible for allowing AIG and other insurers to jump into the CDS market should be placed on trial for criminal negligence.

    How much money is too much to dump into a deleveraging company? If there are not some guidelines then the dollar will be destroyed by excess printing.

    What is more important…Saving the dollar or saving AIG, et al?

  11. john bougearel


    We have free lunch programs in our local schools for kids who qualify. Why don’t we broaden the free lunch program to include all dirty rats.

    The pawn broker metaphor is spot on.

    Reminds me of that most memorable vignette from Blazing Saddles where Sheriff Bart holding a gun to his head says “Nobody moves or the nigger gets it.”

    Olson: “Hold it men. He’s not bluffing.”

    Sam: “Listen to him men, he’ just crazy enough to do it.”

    Bart: Drop it! Or I swear I’ll blow this nigger’s head all over town!”

    Bart (higher voice): “Oh lo’dy, lo’d, he’s desp’it. Do what he sayyy, do what he sayyy.”

    Harriett: “Ins’t anybody going to help that poor man?”

    Sam: Hush, Harriett, that’s a sure way to get him killed!”

    Bart (higher voice): Oooh! He’p me, he’p me! Somebody he’p me! He’p me! He’p me!

    Bart (lower voice) Shut up!. [Bart places his handover his mouth and drags himself through the door to his office].

    bart: “Ooh baby, you are so talented! And they are so DUMB!”

  12. john bougearel


    In hindsight, since the failure of Lehman guaranteed an entire collapse of the economic/financial system, P&B should have let AIG fail too.

    A full deconstruction of the over-networked financial house of cards would have brought about the much needed cleansing of the rot, instead the version 1.0 plan is to sweep all the rot under a TARP and hide the waste ~ the handiwork of P&B knows no bounds.

  13. Matt Dubuque

    As Yves points out, AIG was only regulated on the state level. That “regulation” was chock full of corrupt influences.

    The Fed insisted for years that they needed to be regulated nationally, indeed globally.

    That story is, of course, lost in the big shuffle.

    The Fed got far more punitive terms in its loan with AIG than Paulson ever obtained over at Treasury in behalf of the taxpayer.

    That story is, of course, lost in the big shuffle.

    With Volcker in the picture now, it’s payback time for the Fed and those who believe in rational capitalism.

    Remember Arthur Andersen.

    Volcker and the Fed WILL get even, even if the Joe the Plumber and the pitchfork inflation crowd is clueless as to what is coming down.

    There will be blood on the floor, including the once “venerated” AIG and MBIA.

    This is no time to buy gold.

    Deflation smackdown.

    Matt Dubuque

  14. Stephen

    Thomas J,

    What you said indicates AIG is then only a conduit for funding the counterparties…this may well be the case I don’t know.

    But this raises the larger issue of what did the US govet get for the funding. Why isnt management being cleared out, or threatened with such, why are there constant surprises?

    The last question is the most relevant. The feds have had their money in their for how long now? Shouldnt they have got the full accounting by now, or at least all the major icebergs identified? If this were a private company you would have seen the “I’m from Head Office and I am here to help” people show up, meaning a nice colonoscopy. Curious why this is being allowed to fester, is it too complex for people or reporters to get?

    Re deflation vs inflation…everyone seems to agree there is inflation in future at some point, the path to getting there seems to be in some doubt.

    Matt, can you lay out your thoughts for less schooled like myself as to how you see someone like Volcker generating the “deflation smackdown”, and do you see that deflation only in an asset class or across the board?

    Great post Yves, this needs wider readership.

  15. Cool Head

    Hey! They need the extra money to pay for the next “executive conference” gig in some exotic location. Remember they blew up part of the first bailout money on some huntin’, fishin’ golfin’ and the poor folks have run out of money for the next event.

  16. doc holiday

    Re: locked in negotiations with the authorities

    > That should read, AIG's BOD is being locked up (in prison) by authorities

  17. River

    Matt D said ‘This is no time to buy gold.’

    Perhaps you are right, depending on one’s goals and time frame. If one is afraid of hyperinflation on the other side of the deflationary depression then the purchase of gold on dips is a sane choice.

    Personally I have never trusted fiat currencies no matter who issues them because in every instance they wind up not worth squat. Therefore I have always purchased some gold along with other investments. I am not sorry that I did so and doubt I will be sorry in the future.

    Ruling out the purchase of gold as an inflation hedge does not strike me as good advice. Gold is an insurance policy against inflation, not an investment in the sense of stocks/bonds. If viewed as an inflation hedge in the long run gold makes sense.

  18. 1111

    If you think that these clowns know what they are doing (trying to preserve their position of privilege and power) stay away from gold (which as an old relic) serves as insurance and protection from human arrogance and stupidity.

  19. Anonymous

    Two mistakes:
    1. The government does regulate the AIG holding company. OTS has jurisidiction because AIG owns a thrift.
    2. On AIG’s arrogance, they should have filed for bankruptcy. The government got a great deal, not AIG.

    Lance C

  20. Hank Paulson's Mom

    “…So it is going to increase what it lends to AIG…and AIG is offering the ruse of pledging the MBS because other banks have used MBS as collateral for loans, and version 1.0 of the TARP was to have banks sell crappy MBS to Treasury…”

    TARP should have really been called “Troubled Entities Rescued by Taxpayers”, or TEAT, as in “suckling up to”.

  21. Hank Paulson's Mom

    “…So it is going to increase what it lends to AIG…and AIG is offering the ruse of pledging the MBS because other banks have used MBS as collateral for loans, and version 1.0 of the TARP was to have banks sell crappy MBS to Treasury…”

    TARP should have really been called “Troubled Entities Rescued by Taxpayers”, or TEAT, as in “suckling up to”.

  22. Stuart

    AIG is just one drop in the ocean of all those needing money. People need to fully comprehend what the deficits are going to amount to. The Fed will have no choice but to start full scale printing or alot of selective default or both.

  23. Anonymous

    It should be easy to say no to AIG, as you describe in your well written article.

    But what’s at least as important is that we maintain the integrity of TARP. That means that no TARP money must go for bonuses, i.e. NO bonuses at banks that received injections of TARP money, voluntary or not.

    Your comment that the government shares blame for banks’ failures because they were government regulated, is facetious! There is government regulation of all industries of some sort. If I follow all the traffic laws and get killed in a traffic accident because I didn’t swerve to avoid the drunk driver, is it the government’s fault?

    I don’t know how to prevent bonus payments next month legally, but it must be done or our country will have worse problems. Maybe a revolution would be a solution not a problem though …

  24. SlimCarlos

    >>Volcker and the Fed WILL get even, even if the Joe the Plumber and the pitchfork inflation crowd is clueless as to what is coming down.

    Ah yes, the scary octogenarian. Kinda like Freddy Goes to Wall Street, 'cept now Freddy needs a walker.

    Hey Matt Dubuque, you see this?

    “This is a global crisis and we have to remember where it started,” said Sarkozy, who called on U.S. President-elect Barack Obama to help reshape world economic governance.

    “The time when we had a single currency (the dollar), one line to be followed, that era is over and it came to an end on September 18 when responsibility was taken without our opinion being asked with the failure of a major banking institution (Lehman Brothers), and the consequences all follow from that,” he said.

    But pls — hold onto your precious treasuries. The intrinsic value is compelling and besides, they might be good for starting fires and keeping warm once all is said and done.

  25. Matt Dubuque

    Stephen, in terms of learning more about the impending Volkcer deflation smackdown, I urge you to studiously avoid the American press. It is beyond their comprehension. Immerse yourself in the British press, who have a more rational perspective on economics.

    The key concept to remember, which most Americans do not understand, is that deflation is EVERY bit as pernicious as inflation.

    Bernake was wrong. It cannot simply be “reflated” away. Remember that he was ORIGINALLY brought into the Fed chair to institute inflation targeting because he is a hard money man. His comment on “reflation” was a cavalier one from a person who overstated his knowledge on the effects of hyperleveraging coupled with failed mathematical models.

    I’ve explored these topic at length in this blog and in my Crash of 2008 videos at youtube. A search through the archives here under “hyperdeflation” should prove informative.

    My position is that the KEY risk to be managed is of a deflationary burst, runaway rampant deflation, like what we are starting to see in shipping.

    At a minimum, even if we do manage to avoid a series of catastrophic deflationary bursts to the downside, it is clear that inflationary expectations are going to take a serious hit that no business school graduate will soon forget.

    Volcker is absolutely committed to wiping out the problem of hyperleveraging.

    So are the Chinese.

    That is not bullish for gold, despite what CNBC and the WSJ and NYT say.

    Again, my recommendation is to avoid the American press judiciously and what is in store will begin to come into focus.

    Matt Dubuque

  26. Unscripted Thoughts

    This is just the epitome of the ‘moral hazard’ problem. Are these the same jerkoffs who spent $440,000 of taxpayer cash on a visit to a luxury retreat in California and to add insult to injury by blowing $23,000 on what they insisted were ‘legitimate’ spa expenses? The same buffoons that went on an English partridge hunt costing more hundreds of thousands that included private jets, fine wines, roasted breast of pigeon and limousines to and from the country manor? And God only knows how much they will blow for Executive bonuses this year! These as*hats have a set of stones….and they need to be cut off and hung up as a warning to the rest of the whiny bunch of ‘Richard Carniums’ who can’t seem to manage their finances. What the hell is wrong with the Feds that they can’t even recognize criminal fraud when it is front of their faces?

  27. David Pearson


    I am trying to come up with a generous explanation for why the media is not all over this AIG story. It has all the makings of a killer article that a reporter’s editor would love: greedy management, government malfeasance, a rip-off of the little guy.

    So why no media attention?

    First, obviously, well connected reporters don’t want to lose access to sources, and lose it they would if they went after the NY Fed on this one.

    But what about the non-well connected ones? Okay a segment of them is intimidated by the arcane nature of CDS. But are there any smart reporters that are willing to lose the loss of access? There has to be. Maybe the editors are too chicken.

    We need a Ben Bradlee here. Good thing we have Yves Smith. Too bad not everyone reads Naked Capitalism.

  28. S


    Can therfe now be any doubt that AIG was the dumping ground for the LEH CDS? Seems the full scale PR offensive to damp down worries with the DTC report that after netting it is “only 33 trillion.” I know you highlighted the OTC varitey and how this number understates the true total, but it is way too convenient that AIG is any sort of negotiating position. Perhaps they are whispering to BEnji that if they don;t get a deal they are going to whisper to Bloomberg, who just filed a freedom pon information act request on collateral. The entire system is rotten to the core.


    Thoughts on contra trading strategies on hyperdeflation. Good article on shippers in FT last week saying capesize rates have govne from $240K last year per day to $5K today. 20% of capcity is idled. Also would be interesting to see the comparision on relative basis of the imapct of Smoot vs. simply cutting off trade finance.

    High grade corporate bonds as senior in the cap structre as you can get from major consumer staples around the world lending currency and geopgraphic diversity seems about right – as a nice hedge. Gives you a hedge in both directions

  29. Anonymous


    I am pretty confident neither OTS nor the FDIC regulates the holding company. Amex owned a thrift, as did Ford for a while. If there was any supervision of the parent resulting from their ownership of a thrift, it would have been narrow, not broad.

  30. Yves Smith


    I have told you REPEATEDLY to quit giving investment advice (this site does NOT give investment advice), particularly given that it is so uninformed. Next comment of that sort will be deleted, and if I find two comments from you where you disregard these instructions, I will delete ALL comments.

    I told you a mere two days ago:

    I told you not to give investment advice, particularly when you do not know what you are talking about. Treasuries are in a massive bubble right now due to massive purchases of the dollar to unwind dollar based borrowings and the technical operation of the Fed’s new facilities.

    Second, you are clueless about gold. Too many people buy it for the wrong reasons, and it is a story of value rather than an investment per se, but if you are going to diss it, do so in an informed fashion. What you have written is utter rubbish.

    Any examination of history will prove you wrong. Gold is not an inflation hedge. You buy gold because you think the markets will remonetise the metal as a consequence of a loss of faith in fiat currencies.

    Some look at gold as a sign of inflation, some as an inflation hedge. The reality is that it is neither, except perhaps in the extreme long term. There was positive inflation from 1980 to 2000 yet gold fell from 800 to 250. As an inflation hedge, it would have been hard to pick a worse one! And if gold is rising because of inflation now, why was it falling for 20 years when there clearly was inflation all the way?

    Historically, gold does well in hyperinflation and deflation. Gold does poorly under more normal conditions, and gets hammered in disinflationary conditions, a falling but positive rate of inflation.

    Gold rose in the great depression. Gold is very consistent with deflationary theory about the destruction of credit. Gold, unlike fiat, is no one else’s liability. Money with that attribute (and gold is money), should rise under these conditions.

  31. Anonymous

    Yves, you say “So AIG presumably hopes that the Fed will gamble that the generally inattentive public at large will think this latest move resembles other bank rescue activities and therefore will not make angry calls to Congressmen.” However, many J Q Public members did make angry calls and angry visits to Congressman at the first signs of bailouts. They were largely ignored by their elected officials and the media. The real problem is not the inattentive public, but the corporate-run media that does not provide coverage for credible populists.

  32. Anonymous

    I feel this endless feeding of $$$ to AIG is really to protect Goldman Sachs, as GS reportedly has extreme swaps exposure to AIG. I’m tired of protecting GS to the detriment of everything else.

  33. Anonymous

    Yves:”Matt [Dubuque] I have told you REPEATEDLY to quit giving investment advice (this site does NOT give investment advice)”

    Yves, if you want to raise revenue, I suggest you advertise for investment advisers, funds, or investment newsletters that you do approve of. I think you could make money using your seal of approval. You’re at least as good as Consumer Reports or Morningstar. Plus, Morningstar could use some competition.

  34. Anonymous


    Thank you for explaining gold. As always, your words are clear and correct. I have no money to “invest” in anything. I am also not involved in economics other than personal interest.

    I am curious though about one thing. We have no idea what the future holds but most experts seem to agree that there is some level of deflation on the horizon. The elephant in the room seems to be that we have never, never had this level of debt in conjunction with this serious of a crisis, not even in the great depression.

    From my limited understanding I feel that paying off as much debt as one can, as quickly as one can will also serve as a hedge in a deflationary recession. Clearly this is not for those who are not in such a position however I feel that most people hold more liability than assets.

    We have student loans and a debt to our vet that we pay on monthly. I am currently paying as much as I can (even turning in penny rolls to get as much as I can) to try to pay these off. I then plan on trying to invest in some gold as well as dried beans!

    Does this make sense? If deflation hits hard, and I think it will, these *minor* monthly payments will seem much more *major*. If I have my theory of deflation correct. I figure even if I don’t, I have lost nothing other than debt, unlike some I know who have lost nearly everything they had in investments.

    I am even thinking of cashing in my 401K to pay off debt.

    Thank you as always for your excellent blog.

  35. David

    I don’t agree with you on this. Why should Goldman Sach’s be treated any different from AIG? Goldman was not a bank (though it is now). The treatment is not consistent. AIG did not have a solvency problem. It had a liquidity problem. You can rail all you want about the management and the board of directors but the people who got screwed were the shareholders like myself. The BOD was advised to avoid the protection of Chapter 11 because they would lose their ability to fund legal defenses with the corporation’s money. That is an outrage. They did not act in the best interests of the shareholders and for that reason the deal should be scrapped. The shareholders need to vote. It is our company not theirs. The avoidance of Chapter 11 was really to save Wall Street yet again, not AIG. You can read more about this here

  36. Anonymous

    It seems obvious to me that we are under the influences of the dreaded fascism at work here. Can it be true? Why, who would have thought? It has only been with us since the early 50’s

    People keep asking why the fascist media doesn’t report those financial rascals. Wake up! Maybe it is because they are paid to say or not say what the fascist heads want fed to the sheeple.


    Thanks for speaking some truth to power here. Not much of this around. Keep it up.

    P.S. I was one of those out there with a sign above the Interstate highway at the beginning of this “Bailout” stupidity….but nobody listens to yahoo’s. Until and unless the rule and consequence of law is returned to finanacial transactions, the hole is getting deeper.

  37. David

    Gold as a delation hedge? You might want to read this.

    The argument is that Gold was a deflation hedge when Gold was money and fixed to the currency. But Gold is no longer considered money. Not by most people. So it is not guaranteed to act as a deflation hedge. It might simply fall with all other commodities.

    I don’t really have a strong opinion. I just thought that I would point out that this is by no means a certainty.

  38. Yves Smith


    I am sorry to learn you owned AIG shares. However, it was well known that AIG was a major CDS protection writer, and after MBIA and Ambac got shellacked thanks to their CDS writing, and AIG started making large CDS related writedowns (I believe the first was for 3Q 2007) the handwriting was on the wall.

    And Goldman IS in a different situation. It, unlike AIG, is regulated Federally even before it became a bank, by the SEC (and FINRA in theory is subject to SEC oversight too). So the public would have reason to look to the Federal government to remedy any failures of Federal oversight.

    As for gold, we put this in comments in an earlier post:

    From Fred Sheehan via Marc Faber:

    • England, inflationary periods — the purchasing power of gold: 1623–1658: –34%, 1675–1695: –21%, 1702–1723: –22%, 1752– 1776: –21%, 1793–1813: –27%, 1897–1920: –67%, 1933–1975: –25%.

    • England, deflationary periods — the purchasing power of gold: 1658–1669: +42%, 1813–1851: +70%, 1873–1896: +82%, 1920– 1933: +251%

    The problem with gold is that the US has a nasty tendency to change the rules, as our recent episode with naked shorts illustrates. In 1933, an executive order made it illegal in the US to hold gold coins or bullion. They had to be turned in (citizens were paid at the then current rate under the gold standard). Eight months later, the dollar was devalued by roughly 40%, which would have produced enormous profits in dollar terms to any one holding gold.

    Thus even if one is a fan of gold, one could still easily wind up losing out even under circumstances when gold should do well, by virtue of government intervention.

  39. David

    I was certainly aware of AIG’s CDSs. In fact too aware. The facts are that the actual losses on the CDSs can’t be more than $20B tops, probably much less and that is written off already. The losses being booked are merely mark-to-market losses from an illiquid market. This is why it was a liquidity crisis and an accounting problem, not real solvency issue.

    Being Federally regulated by the SEC does not in any way give you access to the discount window. Banks have that access because they make insurance payments to the FDIC and submit to leverage constraints. For Goldman to claim that they somehow deserve that access because they put up with regulation is ridiculous. Their leverage ratio is three times higher than any real bank and ten times the leverage of AIG. The entire federal reserve system was rearranged to give these Wall Street banks the liquidity they needed when the market shut them off. When that happened to AIG, they were thrown to the wolves. It is not consistent. They should have been given the loan without the 80% equity stake. They should have just replaced the BOD and management. If the loan was not paid back, they get the equity anyway. After the TARP was done, there is no excuse not to allow AIG to participate. This has nothing to do with the Federal reserve system, the FDIC or bank regulation. It is money from the tax payer to stabilize the financial system which AIG is part of.

    Also, I don’t understand the Gold thing. Wasn’t gold used as actual money back in those times? If so, then by definition it will drop in inflationary times and increase in deflationary times just like you stated. But that is by definition, right? That is, it depends how you measure the price level. Today we measure it with respect to the dollar. Gold is independent from the dollar now. But in those days gold was money so its performance in inflation and deflation must have been different.

  40. David

    Just to comment a little more on AIG. The government could solve this problem pretty easily. They could just backstop the CDS portfolio after AIG takes a $10B loss or so. They are not going to lose any money on it. Then AIG gets their collateral back and they can give back the cash to the government. That solves the liquidity crisis at AIG. They wouldn’t need to sell anything.

    If the government wants to protect the tax-payer they can always get warrants for whatever loss is actually suffered when the instruments reach maturity. That way potential investors in AIG would simply need to estimate the actual losses that will be incurred (if any) and factor in that dilution. They don’t need to worry abut crazy mark-to-market rules when there is no market. That way AIG could still raise capital if they need it. If they do a rights offering, I would certainly buy more.

    The situation we have now is simply not good for anyone. It will effectively destroy AIG which hurts employees, shareholders and even the government’s equity stake. The best thing it to allow AIG to return to health as a private company and to throw out the corrupt BOD. It won’t be able to return to health with the government owning 80% of voting equity. It doesn’t do any good for the US economy to destroy one of out largest companies just to make a point about moral hazzard. That time is past.

  41. Yves Smith


    After what happened with Bear, Lehman, Merrill, MBIA and Ambac, I would take any statement by AIG management about it “real” versus “marked to market” losses with several pounds of salt. AIG had a massive, unhedged CDS book. The guys who wrote that business have been fired, and appeared not to have a very good understanding of the risk potential. I am cynical enough to believe that AIG may be putting off a rigorous inspection of its book until year end, when it will have to produce audited financials. That way, any mis-statements by management can be attributed to ignorance and lack of timely information rather than duplicity.

    The world at large thought Lehman had only a $10 billion hole in its balance sheet when it went under. It turned out to be over $100 billion. Everyone, no doubt including Jamie Dimon, thought JP Morgan got a good deal when it took over Bear with the Fed taking $29 billion of losses after JPM took the first $1 billion. Dimon is now telling everyone who will listen that he regrets doing that deal.

    The Fed had someone on site at Lehman; Dimon had his guys go over Bear as best they could in 48 hours, made inquiries of management, and since the CDS exposures were known to be the biggest risk, they certainly got a fair bit of scrutiny. And JPM separately would have had insight into Bear by virtue of being Bear’s clearing bank.

    That is a long winded way of saying if you think you can assess AIG’s CDS losses from the outside, you are kidding yourself big time.

    As for Goldman, like it or not, it is a key member of US and international credit markets, when FAR more debt is (more accurately was) intermediated via the capital markets than through the banking system. The Bank of England, in its April 2007 Stability Report, listed Goldman as one of 16 large complex financial institutions that were systemically important by virtue of their position as crucial capital markets intermediaries. Insurures, by contrast, do not play a role in the intermediation of funds from savers to borrowers. They DO play a different role, like it or not. And insurers are NOT critical credit intermediaries. AIG just happened to get its nose so deeply in one aspect of credit intermediation that it has the potential to drag down other credit intermediaries that they made themselves systemically important.

    Now what I said above means that the Goldmans et al. should have been more closely regulated, as the authorities have learned.

  42. Yves Smith

    As to gold, England had a de facto gold standard only as of 1717, and de jure only as of 1819; the US has a de facto gold standard as of 1834 and de jure as of 1900. You will see gold rose in value in deflationary periods when it did not have formal monetary status.

    Most date the period of the international gold standard from 1880 to 1914. It was reconstituted to a fair degree by 1925 and started breaking down again in the Depression.

    As I pointed out, the risks of treating gold as a monetary proxy in the US, given its history with gold and propensity to meddle in financial matters, is considerable.

  43. Anonymous

    I understand the time for blame is un-productive right now, but after watching these two programs, it begs the question of how it happened at all!

    One is from 1994 and the other Sept 2007. Now if a public broadcasting company from Australia had it right so long ago why not the Agency’s lawfully chartered to protect the Country from such events failed.

    This is the best investigative reporting on the situation that I have seen and everyone can understand it. Obviously one must find information out side the Hurstonian media at work in America.


  44. Anonymous

    Previously we learned that AIG Credit Default Swaps were purchased by Euopean banks. These were used to bypass European banking regulations concerning reserve requirements.

    Isn’t money lent to AIG intended to prop up Euro banks?
    Euro banks face calamity if these CDS vanish. The United States is bailing out Europe, not AIG.
    Europe is still in trouble, therfore AIG is given more money.

    Is it AIG that is extorting more money from US tax payers?

  45. David


    There is nothing wrong with AIG insuring bank loans. The banks did nothing wrong either. This is exactly like insurance companies getting reinsurance. It isn’t some nefarious plot to avoid capital requirements. Really what they did was allow AIG to cherry pick the safest loans and insure them for very low cost. Think a real estate loan to Gillette on a warehouse in Berlin which is 60% paid off. That is a zero risk loan which really doesn’t need capital backing it. So the bank still gets to keep the income with only a small premium and AIG takes the default risk which is basically zero. They also have 12% subordination on the portfolios. This allows the banks to lower risk-weighted assets and write more loans. It gives AIG premium income. That is the majority of AIG’s CDSs (3/4 of them). These have virtually zero losses to date and are not marked to market since there is no market.
    This is another story where the media has screwed it up to make it look like some kind of scandal.

  46. David

    AIG is nothing like Lehman or Bear. First of all AIG has 10x leverage versus 30-40x for the other two. AIG put out a 100 page document on their webpage explaining their entire book including all the CDS stuff. It is no mystery what they have. They tell you everything. Now pricing of actual payouts is not simple but they do show various stress tests. Any reasonable scenario leaves them with manageable losses. Of course, if we have another Great Depression and subprime loans default at a 60% rate with 60% loss on defaults, it might be worse than their stress tests. But I am willing to bet that the recession is not that bad. The more you look at the details, the more you realize that they have pretty good subordination. They really can’t lose anything near what the market prices of MBSs implies.

  47. Yves Smith


    Have you every worked for a bank, a securities firm, a trading business? Do you have any idea of the considerable differences between their internal operating reports and their published financials? Your comments strongly suggest that you do not.

    I looked at their presentation. Lehman also made VERY extensive disclosures prior to their bankruptcy. They proved to be quite misleading.

    AIG does not provide a list of their CDO exposures (transaction names and amounts) nor did I see any third party verification of their models. Perhaps more important, multiple times in the last week, in various Bloomberg stories, AIG managers have said they cannot forecast what the losses will be. So what do you believe, the Powerpoint or the recent statements of management? Both cannot be true.

    I have worked with large scale models. It is VERY easy to bury optimistic assumptions (or make them by mistake). I have found them in as few as three cells in models running over one hundred pages. All they have given you is a summary. You are in no position to evaluate the model. You seem inclined to trust a management team that has proven itself to be poor at managing this sort of risk, unduly optimistic in its forecasts, and dishonest, per its impossible to reconcile positions above and in its dealings with the government. I would stay 10,000 miles away from a business like that, yet despite all the evidence that they are unreliable, you will put your faith in their Powerpoint presentation.

    The overall leverage comparison is not very meaningful because AIG is subject to strict regulatory requirements at the insurance sub level. That capital is available to the parent only in very restricted ways. There are rules as to how and when funds can be dividended to the parent. So your overall levearge comparison is naive. The only way to unlock the equity is the subs is by selling them, and they are apparently not able to find buyers now.

  48. David

    The point is not to calculate an exact value for the CDSs. I know I can’t do that. The point is just to be able to put a cap on worst case scenarios. If they have $30B in subprime CDS exposure, you say that they can’t possibly lose more than $30B. That is just a starting point of course. The company has said that their models predict subprime losses less than $1B with maybe $5B in the stress test scenario. Ok, maybe both are wrong. Maybe you are right that they are being completely dishonest or overly optimistic. But they have written off $20B already because of mark-to-market. That is enormous margin of safety. Even if it is worse than their stress test by a factor of four, they have already made a provision for the loss. None of this has anything to do with me knowing their models. It is more like common sense. An investor can do a fairly simply worst case scenario estimate of AIG and come up with a number which still makes them a worthwhile investment. You couldn’t do that with Lehman or any of the big investment banks. AIG may still fail but it will be for other reasons and not actual CDS losses.

    There is another way completely to know that the mark-to-market losses need to be overstated. Do you think in this market the underlying subprime MBSs could possibly be overvalued? There is no one to buy them. The only people who know how to value them are the ones desperately trying to offload them. It is like if every hockey player in the country had to sell their hockey sticks to people who don’t play hockey. They wouldn’t get a very good price. It has nothing to do with the value of the hockey sticks. So it is a certainty that the market price is at least half the intrinsic value. It is the biggest fire-sale ever.

  49. Yves Smith


    Um, you say $20 billion is more than enough when AIG has already borrowed $123 billion to meet liquidity needs? And they are now asking for more. Why do you think they needed the dough? Any that was used for CDS settlements is NOT coming back. The fact that they are having to look for sales of subsidiaries to repay the borrowings says these are permanent impairments. And we haven’t had the Iceland CDS settlement, and we may have a GM bankruptcy.

    In addition, all the writedowns have been for quarterly reports. Those are not audited. There is a very real possibility that the auditors will be more tough minded than AIG has been.

    As for housing, the problem is much bigger than subprime, I suggest you look at Links last night for the Richard Koo presentation, particularly the trajectory of their post-bubble housing market compared to ours.

    Housing nationwide got considerably out of line relative to incomes and rentals. It would take a 35% fall in housing to get back to long-standing historic norms. And that assumes no overshoot on the downside.

    Meredith Whitney, who has been the most accurate, and bearish, banking analyst, says even she has been too optimistic. The housing market, which is the asset underlying all these MBS, is not going to go down and bounce, unless it overshoots. It is going to go down and then track income growth. And given the lack of labor bargaining power in the US and the long record of stagnant wages here, I would not expect housing price increases to much to write home about once we are past the housing recession. In certain markets that overshoot, yes, but overall, no.

  50. Anonymous

    Yves, this is entertaining, but consider the source. David made a bad investment and is still trying to rationalize it. Anyone with any powers of observation was lightening up on stocks in general, financials in particular, last year. He got it wrong, but he is still insistent on saying that he is right and AIG Is misunderstood! Amazing.

  51. David

    I agree with you about housing but I don’t think any of that matters. The MBSs are already priced well below any conceivable scenario unless we see something like the 1930s again. Maybe we will. Who knows?

    The $20B figure I gave (I think $26B is the exact number) is the write down on subprime. The $123B of liquidity is needed for collateral which they needed to post because they lost their credit rating. This would include the $300B CDS portfolio of bank loans which have had no real loss to date. There is also the securities lending business which needed liquidity.

    Anyway. Maybe you are right, maybe I am. We will know in the future. Thanks for the chat.

  52. Anonymous

    This is 3:32 again. All of the figures cited by David are again based on reports by management, that ARE NOT AUDITED. The collateral posting? Yes downgrades trigger additional collateral posting, but hey, so to do rises in the CDS spreads due to deterioration of the credit. I keep hearing these one-sided explanations and I am far from convinced.

  53. Anonymous

    Ive seen some very good info floating around here, but waiting to see the professionals suggest solutions.

    To me gold is a generational investment never to be touched and I mean NEVER! I started investing into gold in 1975 and in coin not ingot. The rest sits in family owned government geology rights held in patent along with copper/ un-developed. Even though many here have stated quite clearly the fallacy of using gold as a temporary hedge in troubled times. The fact remains that the worlds major gold smelting and processing facility’s can’t keep up with demand. Go to one of these facility’s and on the racks one side is full of trade/wire gold and the ingot/coin is empty. If this consummation of gold can have a negative effect vs monies moving into trading, then here it comes.

    On a personal note can some one over there throw something HARD at Ruppert Murdoch’s head please. To have him buy the Wall St Times/DOW was a bad mistake or never throw your rubbish over board just burn it.


  54. DeflationHawk

    It’s amusing to hear David repeated claiming that a $26BN “unrealized writedowns” is a lot of “margin of safety” for a $80BN+ CDO CDS that AIG has written. You heard it here first, CDOs are worth next to zero and if you wrote protection on $80BN of CDO, you will need to pay $80BN. Nothing less. By framing it “unrealized mark-to-market” loss they have you believe that some of that $26BN will be reversed instead of getting worse. Get a grip on reality David. Sorry it’s not meant to be personal but it ought to sound harsh lest you may make the same costly mistakes in the future.

    This is just on the CDO CDS alone. Now let’s debate how much AIG will lose on its $300+BN of regulatory-driven “bank loan” portfolios. And there are lots of other goodies. No wonder AIG is the liquidity ATM for European banks.

  55. Anonymous

    Deflation is only problematic for debtors, but is beneficial for creditors. The fact that the US is a large net debtor, both public and private, is one reason why deflation will not be allowed to happen if it can be avoided. The result is a negative outlook on the dollar. Under this framework, gold supporters believe the yellow metal would better retain purchasing power, in terms of real goods and services. This is not investment advice, just an attempt at explaining one point of view.

  56. DeflationHawk

    My earlier statement above about CDOs being worth zero even struck me as overly broad. Although it’s a lot closer to reality than you think. Even the 2005/2006 Super-Senior CDOs that Citigroup holds are worth not much more than 20. Though Citi stubbornly kept them marked around 50 in the absence of auditors.

    The fact that matters is, given what is disclosed about AIG’s CDOs, that $80BN loss is the likely scenario. And with the prints created by the few CDO transactions lately, a $50BN loss is the minimum under the most optimistic assumptions.

  57. Anonymous

    Following on my comment above, wanted to add something regarding the Japanese experience. Japan, post-bubble, was a net creditor. Its citizens were and still are prodigious savers. This opened up a different realm of policy responses than is available to the US today.

    Anyone who visits Japan can see that it is still prosperous. With the recent correction in the yen, Japan looks relatively more wealthy than it did just a few months ago. And lastly, GDP growth itself is irrelevant, GDP/capita growth is what matters. With Japan in demographic decline, its citizens have been getting wealthier at a far faster rate than debt loving Americans.

    All of this will become much more obvious over the coming years.

  58. Anonymous

    Lovely AIG story by Jerry Mazza-

    Yes, I agree there is considerable risk in owning physical gold due to possible confiscation by the government, and they have a history of doing so. However, maintaining the position that gold simply “isn’t money”, seems akin to referencing the bible when arguing the existence of god. I find the case against fiat currencies issued by countries with zero hope of ever paying off their debt vastly more compelling.

  59. john bougearel

    @Yves on US gubmint Gold expropriation:

    When all was said and done, even the RFC chairman Jesse H. Jones looked back years later and took a noted pause at the many angry Americans who adamantly believed the Roosevelt Administration’s tampering with the gold currency was “illegal and dishonest, a fraud upon every pocketbook in the land.”

    The dollar was successfully devalued, and served to reflate prices of everything against the dollar. But it served no measurable good for the economy or the people that I have been able to discern (except that the govt robbed them of the one asset that held any value against the deflationary spiral of all other assets). The gov’t was handsomely enriched for this act of thievery. From all appearances, this act had the effect of making the FDR administration look like a bunch of kleptocrats.

    Right or wrong the same delegation of angry American citizens remain every bit as adamant today that our government continues to deflate the and debase the dollar every time they find it expedient to do so.

    In the final analysis, when we look at the bailouts of Fannie, Freddie, and AIG today, we observe another form of expropriation of taxpayers monies taking place by the kleptocracy in the US Treasury, sanctioned and blessed by the administration, lawmakers, and the Federal Reserve.

    And no measurable economic good has come of it thus far: WS is till being paid out its bonuses, the monies that the treasuries have crammed down on banks to recap them are not being used to lend (ludicrous to think it would work in a deflationary spiral and uncreditworthiness run amok!), and no cleansing process of the financial system has occurred. Troubled assets are intended to be swept under a TARP and hidden their until maturity at artificial, fictitiously high and fraudulent prices.

    Its a blessed mess out there, and no one has the balls to clean up the collateral damage. Instead the response we get from Paulson is: “Psst, I’ve got a very big TARP that all you banksters can hide your crap under until maturity or made whole.” Paulson’s TARP is so unsatisfactory and distasteful, not even the banksters want any part of it.

    According to Sarah Hansard, 91% of financial firms surveyed say the TARP’s ‘lack a clarity’ makes them unwilling to participate. 88% also do not want to issue the Treasury warrants as a requirement to participate in TARP. And according to the ABA executive director, TARP is not a plan the banking industry wants or cares for.

  60. SlimCarlos

    @john b:

    >> The dollar was successfully devalued, and served to reflate prices of everything against the dollar. But it served no measurable good for the economy or the people that I have been able to discern

    Then you haven't looked hard enough. FDR's devaluation had the effect of flooding the economy with money — money supply went up 40% over three years (+/-) — arresting a deflationary death sprial, goosing agricultural prices and in general laying the groundwork for recovery.

    I posted a link to a very comprehensive academic paper to this effect a couple of days ago — before carrying on about what you can and can't discern, why not go check it out? Informed debate helps everyone.

    The CBs are slashing rates and it's not working, as was pointed out here today. More direct action is needed.

  61. john bougearel

    Thanks Slim,

    Not sure I can see how the expropriation of the american public’s only store of value (gold) led directly or indirectly to an increase in the money supply back in the 1930’s.

    The causation of the increase in the money supply in the 1930’s sprung largely from the creation of the RFC or reconstruction Finance Corp. This govt-owned bank became the biggest lending agency in the world. Not only did they loan to banks, but they also loaned directly to the rails, insurance agencies, agriculture, states and munis, and every other conceivable industry imaginable that needed it.

    The beauty of the RFC was that it was a govt-owned lending agency.The US economy did not need the stinking credit of the private banks. This is an important lesson that our legislators (the way too many “barney franks” on capitol hill) must relearn today as fast as possible. The cram-down of TARP dollars can not force the banks to lend money as the TARP legislation originally intended. It seems that Pelosi and other lawmakers are finally beginning to grasp this when she advocated using TARP dollars for the Big Three this past week.

    To reiterate, the lesson of the RFC is that we don’t need our financial firms to provide credit directly. Besides are banks aren’t even willing to provide credit in a deflationary and uncreditworthy economy.

    a govt lending agency directly to the industries that need it will suffice.

    The downside of the RFC, and which can not be gotten around, is that new-found source of liquidity had to be funded by issuing govt debt with which the RFC was able to relend the proceeds.

    Of course that only put the taxpayers even further into debt, and the very same situation is repeating today. The cost of this new found source of liquidity is the already debt-burdened taxpayer. The debt-burdened taxpayers wind up saddled with even more debt foisted upon them by the govt after the debt was first foisted upon them by the banks mortgage-lending practices in the past decade. None of this helps the American public in a constructive manner in the short run, and if history is any guide, it won’t help them in the long run either.

    Ultimately, strapping the consumer with even more debt than he/she can responsibly handle only serves to make the consumer even more broke than he/she already is. This of course leads to a further contraction in consumer spending and a further expansion of the deflationary spiral we find ourselves in.

    So, increases in money supply effectively does diddley-squat when the consumer is broke and getting broker by every further issuance of govt debt to provide liquidity to an insolvent financial system.

    It is mind-blowing how stupid this downward spiral gets as it extrapolates forward these supposed fixes and solutions in real time.

    And how a consumer is supposed to get out from under his debt burdens when the dollar debasement resumes is beyond me as well if his or her wage growth does not exceed the rate at which the dollar becomes debased. It is just another giant killer of the consumer (that is how we saw the crisis play out this decade ~ and that experiment failed miserably, didn’t it?)

    Rather than putting financial firms on life support systems, we might as well rip the ventilator from the banks and give it to the consumer, who is every bit at least as deserving as the banksters.

  62. Anonymous

    Agree with John Bougariel.

    And don’t approve the second $350B tranche of TARP. Congress would do well specifically to pass an measure saying it is denied, don’t even bother applying.

    Now, what are we going to do to get more action to stop the payment of bonuses by WS banks including GS? Something has to be done, bonuses will be announced next month so time is growing short to stop it.

    I don’t think either AIG nor GS deserved kid-glove treatment. GS should have gotten it the same way AIG did. For them now to pay bonuses — there are no words for it.

  63. Francois

    Time to nationalize AIG outright.
    Enough pussyfooting around “ideological considerations” and all this grade-AAA bullshit.

    BTW, it looks like it is time to seriously consider a strict limit on honoring CDS contracts.
    What do I mean by that? Any CDS contract that was entered by someone who did NOT own the underlying asset to protect (a.k.a. pure speculation for the hell of it) should see the contract voided.

    We all know that “special interests” did not want to see CDS’s regulated. Now we can all contemplate the disaster and I fail to appreciate why society should keep on going along with this. After all, would any Joe or Jane would accept to have all their neighbors take a fire insurance on his/her house?

    Time to get tough on financial mumbo-jumbo. Finance servees the economy, not the other way around.

  64. mxq

    Yves’ revulsion is well placed.

    Unfortunately the powers that be just said “f*** it, make it a cool, round $150bn…oh yeah, and libor + 3 instead of 8.5 + libor on that loan.”


  65. Silas Barta

    Yves_Smith: Remind me again why I don’t already visit this blog regularly :-) Awesome post. (I first learned of you in your bloggingheads deal with Megan_McArdle.)

    Of course, this irritating tiny comment window leaves room for improvement …

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