AIG CDS Situation Worse than Lehman

Sources:

AIG Stock Slides, Bond Risk Jumps on Capital Concern
AIG shares fall 20 percent on mortgage woes

CDS picture via CMA DataVision

Comments

[Ishortyou:]

oops..

2008 Sep 14 07:33 AM

[Phil Yerbuc...:]

Situation or Reaction?

2008 Sep 14 08:19 AM

[User 201843:]

So at aprox 12.48 on Friday close where is it headed?

2008 Sep 14 08:43 AM

[mysaug:]

No text ? If I show a picture of an empty football stadium, could you then conclude that no one goes to football games? Of course not, everything needs to be in context.

Fridays fall was an attack by shorts in reaction to LEH opportunity and to attack before plan given on 26th. They knew only a small window.

We will get a workable plan tomorrow and when these instrumnets run out we will see billions added back to bottom line on next 1-4 years.

2008 Sep 14 08:45 AM

[tilut:]

mysaug , well said.Shorts must be stopped or they will destroy the american financial system and its economy already ailing.Their criminal practice of attacking financial institutions to death must stop and US authorities shall intervene heavily to that effect.

2008 Sep 14 09:28 AM

[rnjb:]

Well, if they are criminals, let the good guys with capital come in and buy the "cheap" stock. Somehow, they do not seem to be around. Perhaps they know the same thing.

2008 Sep 14 09:52 AM

[Tom Armistead:]

The CDS spreads is simply a form of manipulation: by bidding the spreads up that high the short and distort crew conveys the impression there is something dreadfully wrong, adding to their profits on the naked short-selling activity.

MBI's CDS spreads were at astronomical levels at a time when the cash in the holding company was sufficent to cover all sheduled debt obligations for five years! In point of fact the desire to profit on CDS for MBI was what drove Ackman's defamatory attacks. This went on for months.

The CDS spreads on AIG are equally out of sync with their actual financial strength, whihch is double A. Any downgrade from S&P or Moody's has nothing to do with AIG's ability to meet its obligations: instead it reflects catch 22 reasoning about financial flexibility.

Credit Default Swaps are a form of unregulated insurance. Unlike in fire insurance or life insurance, there is no requirement of an insurable interest - there is no need to own AIG's debt in order to buy insurance on it. The result is moral hazard: those who buy the insurance have an active desire for a loss to occur and do their best to make it so. It is the financial equivalent of arson.

The present financial crises is in large part fueled by this exact form of moral hazard. The graph of AIG's CDS spreads simply says: financial arson attempted. At some point the SEC, Treasury and the Fed will go after the financial arsonists, rather than constantly responding to incendiary blazes until the whole village is incenerated.

2008 Sep 14 08:41 PM

[oldsuretyguy:]

CDS, they're "lipstick on a pig............."
About ten years ago before retiring, my company hired a top surety executive from AIG who made a comment about his former employer to the effect that AIG has created a "financial timebomb" that when made public, will rock the insurance/surety industry. The rank and file had no idea what he was talking, but boy we do NOW!
CDS's are nothing more than the hated "credit guarantee" which are a surety industry "no-no", a Taboo and a form of guarantee that no surety would undertake under any circumstance since they are well known financial losers. I don't care how you dress it, a CDS is a straight financial guarantee and coincidently, unless the insurance company is licensed as a financial guarantee company in New York state, they cannot write these obligations or do business in New York State. Where does AIG do business......NY state! Are they a licensed Financial Guarantee market? Not sure but I doubt it......
Something wrong here or just plain rotten! I think AIG tried to avoid some annoying or confusing insurance regulatory technicalities when they decided to describe this obvious credit guarantee as a Credit Default Swap rather than an insurance policy or a surety obligation(an undertaking since I doubt an indemnity agreement was ever obtained). Did these things come with any subrogation rights or some form of indemnity to the insurer(CDS originator)? What the hell is a Credit Default Swap? Is this some form of idiotic Wall Street techno junk language that inherently creates a market value for the underlying obligation? If this were an insurance or surety obligation, it would never have been a stock market product. The Surety reinsurance markets would have been involved, however, no self-respecting reinsurer would have touched these obligations and all credit guarantees are excluded under reinsurance contracts with the primary insurer. I think AIG pulled a fast one and is running 180 degrees contrary to normal insurance industry practices and risk aversion. In this instance, the fragrance of the premium clearly outweighed the stench of the risk! As we used to say in our business, "There are old Sureties and there are bold Sureties, but there are no old bold Sureties!" This applies to any financial lender, guarantor or insurer.
Frankly, I believe that this is just another example of what's wrong with the unregulated US financial system. There are too many odd-ball financial schemes or gimmics....derivatives included that need to be heavily regulated or just plain eliminated from legitimate financial markets. Little or no regulation leaves them wide open for exploitatation and unfair manipulation. The stock market is a fools paradise particularily because an abundance of day traders. The markets are plagued with too many fast buck traders and too few investors. What a mess........

2008 Sep 28 06:33 PM