AIG

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slabinja's picture
slabinja
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AIG

Here is a link to an interesting article in regards to AIG: 

http://turcopolier.typepad.com/sic_semper_tyrannis/2009/03/how-deep-is-the-cds-hole.html

 Any comments would be appreciated. 

If someone has a policy with AIG, for expample, a life insurance policy, what happens to their policy if the company collapses?

SkylightMT's picture
SkylightMT
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Posts: 125
Re: AIG

The policy would be sold to another company.

However, AIG would have us believe that their collapse would be worse than Lehman, and would trigger complete economic collapse. Here's the "leak:" http://www.scribd.com/doc/13112282/Aig-Systemic-090309

I think they are telling the truth. It would collapse the derivatives market, quickly followed by money markets, quickly followed by everything. They're not lying. If anything, they're understating.

So with the collapse of everything, I don't think a life insurance policy is going to be an honored contract no matter who owns it.

Sometimes in the ER you get a patient that you know is dying. Its inevitable. But the doctors and the nurses say, "not on my shift." And they work their heroics to make sure that patient doesn't die on them. But that he will die, there is no doubt. Obama is like that doctor, I think. Some people are screaming for him to let the patient die because its costing too much to keep the inevitable at bay. But the way I see it, debt isn't going to matter much when the whole thing collapses. So... doesn't really matter how much they spend prolonging things.

DrKrbyLuv's picture
DrKrbyLuv
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Re: AIG

If the derivatives market blows up it will vaporize everything in it's path.  There isn't enough money on the planet to pay off the wagers.  So, it becomes obvious that propping them up is procrastinating at best, the only possibility is to declare them all null and void.

Until we do, the counter-party in defaults will bleed every dollar we can create - no matter how many generations of debt the government might be willing to absorb.

Larry

FireJack's picture
FireJack
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Re: AIG

Is it possible to make a clearer picture of what that would be like. I'm aware of how large the derivatives market it but how would it be the end of everything. Something with a little more detail would be nice because if AIG is going down in a few months and it means the end I want to have my doomstead ready.

SkylightMT's picture
SkylightMT
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Re: AIG
FireJack wrote:

Is it possible to make a clearer picture of what that would be like. I'm aware of how large the derivatives market it but how would it be the end of everything. Something with a little more detail would be nice because if AIG is going down in a few months and it means the end I want to have my doomstead ready.

No... I see this question a lot on other boards, as well.

I think everyone wants to know exactly what the derivatives collapse, if there is one, will look like, and no one really knows, in part because of the OTC derivatives which are hugely unregulated. Even the 700 trillion number is an estimate. There is no way to add them up, any more than you can add up all the Superbowl bets made between neighbors.

FireJack's picture
FireJack
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Re: AIG

All these uncertainties leave me in a state of confusion. When googling derivatives I came upon this:

 

Capital idea: The booming derivatives market gets its due

What's interesting about markets that use derivatives is that their
overall volatility goes down. Think about that early grain market. If
derivative-using farmers are buying more in the spring (when the price
was high) and less in the fall (when the price was low), the overall
volatility in the price of grain should go down. The entire market
should be smoothed.

In that sense derivatives are a genuine advance in financial
forecasting. They've also improved life in general. How many people
have benefited from our current low mortgage rates?
Not only have
derivatives provided a new transparency that allows everyone in the
market to better negotiate the bumps and shocks of economic life, but
the shocks that do emanate have less effect. We've reduced the
possibility of financial shock and awe. That has to be, overall, a good
thing.

Okay obviously this was written before 2007.

Then there is this one which is newer:TMX makes European beachhead with LSE derivative-market collaboration

 

Then there is this on the globe and mail today:Canada will be first to rebound, PM says

 

Oh look the markets are going up phew recession is over that was tuff wasn't it time to move on. Read about how people during the great depression were like that too, just waiting for it to get better any time now and it just kept getting worse. I guess all I can do is prepare for the worst and hope for the best. I know another set of bad morgages are coming along (the alt a and option arms) that will be slightly worse and all the stops have been made. Makes me want to rip my hair out. 

 

 

 

 

A. M.'s picture
A. M.
Status: Diamond Member (Offline)
Joined: Oct 22 2008
Posts: 2367
Re: AIG

So what's the bottom line with AIG?
Are they likely to collapse? Based on...?

Sorry for all the newb questions - I'm trying to follow this stuff, but am still learning.

Cheers!

Aaron

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: AIG

Aaron Moyer

So what's the bottom line with AIG?

Let me take a stab.  AIG is insolvent.  We prop them up as a zombie company because they hold a gun to the government's head. 

  • First, they insure a huge amount of private and corporate entities for loss and casualty (they are the biggest insurer in the world - I think) - providing every type of insurance
  • Second, they are huge derivative players (cds & cdo)

So you may ask why would an insurance company; proficient at risk management, gamble in the $700 trillion (give or take $300 trillion) derivatives market (they are bets, not investments).  They do it because they calculate that they can mitigate their potential losses while providing an opportunity for huge rewards for the company and shareholders.  Derivatives are measured in "notational amounts" because usually one side only is collected.  The "bets" are huge because the game is to alternatively tier many bets (yea, a pyramid scheme) - to end up with a relatively small percentage - but big dollars.

For example; AIG could enter into a "counter-party" contract (they place a bet) that the Dow will drop to 5,000 - and there are often "odds" so a buck can win two bucks.  Now simultaneously, they may write another counter-party contract bet that the Dow will fall below 6,000.  So, if the Dow falls to 6,000 they win, if it falls to 5,000 they lose. 

They add bet after bet trying to win the sequence until they calculate they can't lose.  To continue our example, they might place another bet that if the market falls to 4,900 and they win again.  I think you get my point, the bets can go on and on, and they use computer models to analyse the possibilities for simultaneous bets.

Since the bets are are not won or lost - they are contracts with no consequence; technically, they are neither liabilities or assets and they remain off the corporate balance sheet.

Now, here is the problem - what happens if someone defaults (are no longer to pay) before the contract expires?  Will it be like dominoes where bet after bet defaults?

I can't answer but there is much speculation in the news and we know that hundreds of billions of dollars have already gone to AIG's derivative counter-parties.  For example, we may be paying AIG counter-parties with no hope, if AIG goes under, to collect from other counter-parties - after all, they win and lose bets.  The big question is, are we throwing money into a black hole that can never be filled? 

Many experts have argued, simply write them all off - make it a zero sum game.  By taking over these companies like AIG, we are effectively taking over their endless liabilities (quadrillion dollar derivatives market that no one can really follow).

Larry

Relevant stories:

Pressure to reveal major AIG counterparties grows 

AIG: Where taxpayers go to die

The $700 trillion dollar elephant

A. M.'s picture
A. M.
Status: Diamond Member (Offline)
Joined: Oct 22 2008
Posts: 2367
Re: AIG

Larry,

Thanks a lot for the analysis - I appreciate it.
More discussion to come.

Aaron

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: AIG

AIG numbers:

  • 80% of AIG is owned by the taxpayers but yet, we are unable to get any disclosure as to where their bail-out money has gone
  • AIG lost $62 billion in the fourth quarter
    and $99 billion in all of 2008
  • The Federal Reserve and Treasury commitments of public resources to the bailout of
    of AIG have gone from $80 billion to $162
    billion
  • AIG sold over $500 billion of toxic credit default
    swap protection
  • Given that common shareholders of AIG are already
    effectively wiped out, the bailout
    of AIG is a bailout of the creditors of AIG that would now be insolvent
    without such a bailout
  • News reports suggested that
    Goldman Sachs got about $25 billion of the government bailout of AIG and
    that Merrill Lynch was the second largest benefactor, these are educated guesses, as the government is hiding the counter-party
    benefactors of the AIG bailout
  • Citibank, Bank of America, HSBC Bank
    USA, Wells Fargo Bank and J.P. Morgan Chase reported
    that their "current" net loss risks from derivatives - insurance-like
    bets tied to a loan or other underlying asset - surged to $587 billion
    as of Dec. 31 - a jump of 49 percent in just 90 days

The whole system seems to be insolvent and by continuing in this fiasco, we are nationalizing losses while profits remain privatized.  No one in their right mind would buy AIG's liabilities - which are still not known - but this is exactly what we the taxpayers have been forced to do. 

Larry

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