Thought this was an interesting article. I am very interested in hearing some comments from you intelligent people instead of the morons on digg. It would be great if someone could explain to me why there was so much counterparty exposure in AIG? http://www.time.com/time/business/article/0,8599,1885578,00.html?iid=digg_share
AIG will die when GS et al get their money back. 
AIG fails, the economy shuts down.
TA05 Wrote: ------------------------------------------------------- > AIG fails, the economy shuts down. LOL - i understand that is what we are being told I am just trying to understand why that is. I have heard many people say that and have yet to hear an explanation why. Could someone explain to me how a CDS works and why these instruments would expose other institutions if AIG were to go under. I am asking truly to understand. I think that most people don’t question enough and make snap judgments without understanding the details. Thanks for your help.
You make a bet with somebody. You win, but you don’t get paid right away. That’s ok, because now you have money to go out and buy lots of expensive sh!t on credit. Then your friend comes back and says they can’t pay you out on your bet because he made the same bet with lots of other people and ran out of cash. You’re screwed with all that sh!t you bought on credit. The end.
I don’t know why AIG had so much CDS exposure, but part of me feels that because a CDS is essentially an insurance product, many people figured “AIG is an insurer, so they probably can handle this product better than most others.” As a result, they got a to write a disproportionate share of the CDS contracts. In non-volatile times, the product was sufficiently profitable, that AIG might have drunk their own kool-aid on this too.
JohnThainsLimoDriver Wrote: ------------------------------------------------------- > You make a bet with somebody. You win, but you > don’t get paid right away. That’s ok, because now > you have money to go out and buy lots of expensive > sh!t on credit. Then your friend comes back and > says they can’t pay you out on your bet because he > made the same bet with lots of other people and > ran out of cash. You’re screwed with all that sh!t > you bought on credit. The end. Excellent!
JohnThainsLimoDriver Wrote: ------------------------------------------------------- > You make a bet with somebody. You win, but you > don’t get paid right away. That’s ok, because now > you have money to go out and buy lots of expensive > sh!t on credit. Then your friend comes back and > says they can’t pay you out on your bet because he > made the same bet with lots of other people and > ran out of cash. You’re screwed with all that sh!t > you bought on credit. The end. he called it
Basically, AIG is a casino offering a game called CDS. GS et al noticed that AIG underestimate the odd of CDS payout, so they bet against the House. Now it turns out GS et al are right but AIG has no money to pay. So we have to foot the bill for AIG. 
I remember 5+ years ago reading about AIG and their “black box” earnings. I had a discussion with my dad that I feel stupid when I look at AIG financials.
JohnThainsLimoDriver Wrote: ------------------------------------------------------- > You make a bet with somebody. You win, but you > don’t get paid right away. That’s ok, because now > you have money to go out and buy lots of expensive > sh!t on credit. Then your friend comes back and > says they can’t pay you out on your bet because he > made the same bet with lots of other people and > ran out of cash. You’re screwed with all that sh!t > you bought on credit. The end. That sounds reasonable but I’m not sure. Lets say for example GS is the protection seller for these CDS and is due a windfall. Are you telling me that they don’t take into account that AIG might fail to make payments? Using your analogy if I made a bet of 100,000 with a friend that I won…due to the size of the bet I wouldn’t immediately by a Benz. Maybe I’d feel safe enough to by a XBox 360 but I’d wait until I made a collection on such payment. I so irrationally emotionally involved in this whole AIG bonus fiasco. In the big picture it means nothing for the economy and is small potatoes but oh it makes me furious.
thepinkman Wrote: ------------------------------------------------------- > That sounds reasonable but I’m not sure. Lets > say for example GS is the protection seller for > these CDS and is due a windfall. Are you telling > me that they don’t take into account that AIG > might fail to make payments? Using your analogy > if I made a bet of 100,000 with a friend that I > won…due to the size of the bet I wouldn’t > immediately by a Benz. GS wouldn’t be a protection seller in this case, they would be a buyer since AIG is the seller. And yes, GS was putting up leveraged capital – ie. their version of buying a Benz – against their position and then marking their gains up, but if AIG defaulted on the swap then those gains would be wiped out on the asset side but the leverage would still be a liability.
NakedPuts Wrote: ------------------------------------------------------- > Here’s why: > > http://paul.kedrosky.com/archives/2009/03/the_aig_ > blackma.html Excellent - that answers my question it seems like an unfortunate but compelling reason for AIG receiving bailout money. What scares me however is that this money was given without any reformation to the system and gives future corporations the incentive to strap bombs to themselves and go into orphanages demanding money. Do you guys think there is any way to legislate against a corp. becoming to entangled in the economy? thanks for the great explanation johnthains
imcrnhlio1 Wrote: ------------------------------------------------------- > NakedPuts Wrote: > -------------------------------------------------- > ----- > > Here’s why: > > > > > http://paul.kedrosky.com/archives/2009/03/the_aig_ > > > blackma.html > > Excellent - that answers my question > > it seems like an unfortunate but compelling reason > for AIG receiving bailout money. What scares me > however is that this money was given without any > reformation to the system and gives future > corporations the incentive to strap bombs to > themselves and go into orphanages demanding money. > > > Do you guys think there is any way to legislate > against a corp. becoming to entangled in the > economy? > > thanks for the great explanation johnthains But can’t we restructure AIG such that its AIGFP can fail on its own along with GS et al and then keep the rest of AIG intact? For example, Lehman Asia was cut out and sold to Nomura
While I do not particularly like the idea that AIG bonuses are being paid. The CEO makes a valid point. Should we not give compensation to these people currently IN AIG, then it is possible that they will leave for greener pastures (yes even in this market), causing further turmoil. Quite frankly this has been given WAY too much attention, not too much logic is going into this and the only thing I really see is people want blood. All options SUCK. Lets pick the least worst LOGICALLY and whats best in the long run and move ON.
CFABLACKBELT Wrote: ------------------------------------------------------- > While I do not particularly like the idea that AIG > bonuses are being paid. The CEO makes a valid > point. > > Should we not give compensation to these people > currently IN AIG, then it is possible that they > will leave for greener pastures (yes even in this > market), causing further turmoil. > > Quite frankly this has been given WAY too much > attention, not too much logic is going into this > and the only thing I really see is people want > blood. > > All options SUCK. Lets pick the least worst > LOGICALLY and whats best in the long run and move > ON. The people who caused this mess should be chained to a computer and be forced to unwind their positions until they die of exhaution.
thepinkman Wrote: ------------------------------------------------------- > CFABLACKBELT Wrote: > -------------------------------------------------- > ----- > > While I do not particularly like the idea that > AIG > > bonuses are being paid. The CEO makes a valid > > point. > > > > Should we not give compensation to these people > > currently IN AIG, then it is possible that they > > will leave for greener pastures (yes even in > this > > market), causing further turmoil. > > > > Quite frankly this has been given WAY too much > > attention, not too much logic is going into > this > > and the only thing I really see is people want > > blood. > > > > All options SUCK. Lets pick the least worst > > LOGICALLY and whats best in the long run and > move > > ON. > > The people who caused this mess should be chained > to a computer and be forced to unwind their > positions until they die of exhaution. Nice thinking. Lets turn back the societal clock a few hundred years!