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?
“Insurance CDS’s are bets not insurance, insurance requires that reserves be kept against losses and the reserves be re-calculated as risks change…”
This has been my feeling all along. Therefore, why not mandate that these activities be defined as insurance. Sellers must be regulated like insurance companies (at the state level?); buyers must own an insurable interest in the underlying assets; etc.
Maybe this is naïve to those more knowledgeable about the CDS industry dynamics. If so, would someone please explain why in lay terms?
Sorry, obviously I was replying to Lyle’s comment.
Insurance CDS’s are bets not insurance, insurance requires that reserves be kept against losses and the reserves be re-calculated as risks change. CDS’s are just part of the Casino that Wall Street has become, with the house (Goldman et.al.) making a killing on the flow. I have often wonders odds a Vegas bookie might charge on the various CDS’s out there, or is it possible she might say I don’t want to play that game?
Short der Welt.
(How do you say “Short the world” in deutsche?)
Full translation of the Handelsblatt article into English on my EuroSavant weblog here.
Is there any chance that CDS is banned in the future?
doug
I always felt that insurance is a bet you don’t want to win.
If corporations are like individuals, they we should not be able to, in effect, take out term insurance on someone whose mortality we control.
Basic insurance law forbids insurance without real interest in the underlying asset to profit from insurance.
AIG has also had its dealing with the Washington crooks but how come there isn’t any care about Goldman Sachs and their crooked dealings? Blankfein was actually on the phone every day throughout the economic collapse with former Treasury Secretary Paulson but yet they charge this guy and not the other financial terrorists!
AIG sprayed the market for years with underpriced bond insurance.
The company should have been dismantled in bankruptcy. Period. This argument cannot be defeated on moral grounds, only on pseudo-pragmatic grounds.
When small businesses’ get stiffed by vendors, they have to go to court and get in line to get their money. Hence, counter-party risk presents a big, if not the biggest point of order in decision making.
But I guess if you have a direct line to Congress, just make a deal that is profitable on paper, pay yourself first, and when the other guy comes up short – run to Washington and cry foul. Disgusting.
And as an earlier poster noted, insurable interest is a key point here.
Its been 18 months since the collapse. Instead of rebuilding we are propping up failed institutions with otherwise useful capital.
Again! Follow the trail of stench to GOLDMAN, the arranged the swap, then sold it back to the Greek bank, RON PAUL just said this at the Conservative Convention (from Mike Shedlock’s blog), http://globaleconomicanalysis.blogspot.com/
“Is it possible that our Federal Reserve has had some hand in bailing out Greece? The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.
Greece is only the latest in a series of countries that have faced this type of crisis in recent memory. Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland. Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well. Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big US banking cartels. Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent.
Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.”
Also from you link, Mish says:
Indeed.
I frequently wonder if, given magnitude & scope of global finance shell game, classical economics is going to go down the tubes right along w/manifestations of these guys finance models.