Wednesday, March 18, 2009

My brain hurts

Does the world of credit default swaps (CDOs), derivatives, counter parties and such, make your brain hurt (as Jethro Bodine was found of saying)? Try this analogy:

Imagine that A.I.G. wrote insurance policies (CDOs), for a specific period of time, for fleets of cars owned by Goldman Sachs, Merrill Lynch and a bunch foreign banks (the counter parties). A.I.G.’s credit rating was cut last September, which required it to put up additional capital in reserve against potential claims. They didn’t have the money, so in order to prevent the cascading collapse of counter parties, the government gave A.I.G. a series of capital infusions which have now reached $170 billion -- money supplied by the taxpayers.

Either A.I.G. didn’t tell the government, or the government didn’t tell us, how that money was going to be used, but this week we found out that A.I.G. used almost $50 billion of the money to buy the fleet of cars from Goldman, Merrill and the foreign banks, paying them the full value of the cars even though there has been no accident claims against them so far. Here are a couple of things A.I.G. and the government could have done instead:

1. They could have waited until one of the cars was in an accident, and paid that claim only; after all, it’s unlikely that all the cars are going to have accidents. If an accident did occur, they could have negotiated with the clamant, offering, say 75 cents on the dollar, since this was taxpayer money. What could Goldman do about it?

2. They could have offered the banks fifty cents on the dollar for the cars. Then at the end of the insurance time period they could have sold the cars at market value and had the possibility of making a profit. (But, since they paid full value, that possibility no longer exists.)
So A.I.G. was simply a clearing house for the funds which were passed on to other large financial firms that may, or may not, have had a pressing need for the funds.

This analogy is flirting with the border of Oversimplificationland, but is essentially the reality of what has gone on. The five largest sums went to:

Société Générale $11.0 B
Goldman Sachs 8.1 B
Deutsche Bank 5.4 B
Merrill Lynch 4.9 B
UBS 3.3 B

This, you will notice, is quite a lot more money than the $165 million in bonuses that everyone has their knickers in a twist over now. And while I don’t think those bonuses should be paid, the bonus flap is a pimple on Lawrence Summer’s behind compared to this. If one guy on Wall Street ever earned his money, I think we can say the Henry Paulson earned every penny Goldman ever paid him for arranging this deal for his long-time employer. And he’ll never have to buy a meal again when traveling through France, Germany or Switzerland.

7 comments:

rsb said...

I don’t know if this is accurate, but my tax man told me today that a large number of congressmen were/are shareholders in AIG, another reason to bail them out.

AY said...

Well, I guess the investment bankers at GS earned their bonuses after all.

Who else could have managed to hoodwink everyone into believing AIG was being bailed out yet never being required to disclose that GS creditors were the real beneficiaries of over $150 billion worth and counting of taxpayer largesse.

And who better to run AIG, but Paulson and Cheney's handpicked buddy Liddy who also served on GS Board of Directors!!!

warrenout said...

Dennis, your brain hurts because you cannot stand liars and hypocrites. In 2 years we won't even remember any of their names.

d'blank said...

Liddy was on the Goldman board? i did not know that. these people will take every last dime in the treasury before they are done.

AY said...

And worked at GD Searle when Cheney was President of the company. This is beyond cronyism. We're sooooo f.....ed!!!!

Gaga said...

i'm beginning to think its not impossible for us to wakeup one morning & findout that every exec in charge of every 500 company with offices overseas is gone. They'd have no problem being Swissed up & living in Venezuela If anyone has an AIG employee list please send it along. My friends Tony & Bruno from Philly have been requesting it for awhile now.

Gaga said...

In auto news today: Buick(GM) & Jaguar(Ford) have tied & dethroned Lexus(who cares) on the JD Powers Reliability List. One step for man......