AIG CDS Unwind: From a Waterfall to a Trickle

As Zero Hedge initially reported nearly two months ago, the main reason why the banks' fixed income trading desks generated phenomenal profitability in January and February had nothing to do with actual trading of fixed income and everything to do with AIG's hamheaded (and loss-generating) unwind of its CDS book, which by implication generated one-time, massive profits for counterparties to the trade (read: the banks, which are now doing all they can to issue shares in the open market day in and day out on the coattails of the phenomenal short squeeze that this unwind generated).

AIG CEO Ed Liddy provided some more fire for this hypothesis yesterday during his testimony before the House Financial Services Subcommittee. In a very odd twist, Liddy, who in March had disclosed that AIG-FP had unwound over $1.1 trillion in CDS notional (from $2.7 trillion to $1.6 trillion - a ridiculously large amount), yesterday noted that the financial black hole had succeeded in only unwinding an additional $0.1 trillion in the last 2 months, from $1.6 trillion to $1.5 trillion.

The obvious question that arises here is why did AIG slow down its CDS unwind process so much?

Some potential answers: i) the banks do not need any taxpayers gifts now as much as they did in January and February; ii) the financial blogosphere (and to a much smaller extent, the mainstream media) is now fully aware of the taxpayer thuggery that AIG committed when it unwound the $1.1 trillion in no time, and iii) Andrew Cuomo is monitoring every CDS transaction at AIG-FP under a microscope now, so wholesale dumping could be a "tad" more problematic.

The logical implication is that if banks need to break the taxpayer piggybank again, it will be next to impossible to abuse the taxpayer funded rainy day fund. Therefore banks better all raise equity stat or else the pain in Spain will soon be unbearable: ergo a wholesale, orchestrated short squeeze rally.

I provide the full transcripts from March and May for compare and contrast purposes.

Update: some interesting thoughts from Denninger. Good read.

Full May transcript below.

Comments

[fatcat:]

Just wait for the commercial RE resets....they will have to find another conduit ,like AIG,to funnel money into that mess.

BTW,Obama said this morning that TARP paybacks would be re-invested into smaller banks.Nobody is talking about that..

May 14 05:09 AM

[James Cullen:]

Another possible answer: spreads have been tightening across a variety of asset classes (CDX, ABX), and since the trades are not going against AIG as much as they previously were, their ability to hold them and see what happens has been improved.

May 14 03:22 PM

[bricki:]

> The obvious question that arises here is why did AIG slow down its > CDS unwind process so much?

Somebody told them to stop. Pelosi? Presumably because there is some political backlash developing about the terms of the unwinding.

May 14 06:06 PM

[dcb:]

I don' t think Pelosi has the brains for that. Perhaps Liddy was afraid he would end up in jail.


On May 14 06:06 PM bricki wrote:

> > The obvious question that arises here is why did AIG slow down
> its > CDS unwind process so much?
>
> Somebody told them to stop. Pelosi? Presumably because there is some
> political backlash developing about the terms of the unwinding.<br/>
>

May 15 02:45 AM