D-leverage

AIG: Before Credit Default Swaps, There Was Reinsurance

I have a similar reaction as FID on the letter and on several other points.

That said, well done article, one that deserves some attention.

Points to tighten up for this financially knowledgeable outsider…
- Getting into the CDS market was probably actually a very logical extension of insurance business (not so "mysterious"). Collecting premiums with little risk of payout and (no better yet, with no collateral posting) is what the big guys get to do.
- Finite insurance in and of itself is not a "scam", but perhaps the term has become synonymous with problems (same said for side letters, which the article explicitly, and unfairly describes as "criminal acts")
- "Give me $6 million today, and I will give you a promise that we both know I will never honor" sound NOTHING like the CDS market. (that is an outrageous inference)
- “ "No claim will be made before the commutation date", which may be interpreted as being a warranty by the insured that no claims shall be made under the policy [ever].” Couldn't the “commutation date” reference a metaphor using CDS language that indicated the beginning of the contract -- who knows -- but whatever the case, the inference of NEVER paying out (as FID above indicates) is not as clear as the author seems to indicate.

I don't want to defend AIG, or the dogs in FP, because I do beleive that there was very bad stuff going on, but with a bit more tightening, the credibility of article could be improved.

CDS Recoveries: Down and Out

AIG takes the risk for 2% because the CDS allows them to take the risk with the hope that there is only one cash flow --> that flow being a 2% premium to the seller of protection (AIG). The bank lender may get its 10% on its loan (likely more like 5-6% prior to crisis), but that lender is actually forking over (lending) real dollars to take the credit risk of the borrower. AIG did not have the cash to back up the debt -- and I don't think they even had to post collateral like most counterparties would. AIG probably looked at the CDS as a logical extention of its core insurance business, because that's fundamentally what the CDS is -- insurance.

Curing the Credit Crisis: A Better Alternative Plan

Concur with tvb's comments most.

This author mistakes "par value" with Bernake's reference to "hold-to-maturity pricing”, which will be much less than par value, but perhaps above the fire-sale price. Deposit protection is clearly not the core issue in this crisis, although the FDIC may have the answer to solving some issues. We don't have a depositor mess, we have a capital markets mess. The author provides more divisive ranting than real solutions in this article.

Paulson/Bernanke: $700 Billion at 'Hold to Maturity' Pricing

Kudos to those who are constructive and balanced, however unpopular that is on the web. Because while some are beating up on Paulson, Bernake and references to “saving” Wall St, we should also talk about the house flippers, the speculators, the low-doc, no-doc, “anyone with a pulse is approved” mortgage brokers and bankers, and the people who let their credit scores get to the sub-prime level – some of these folks have addresses on Main St. USA. Of course the people of CA, FL, AZ, NV (and even OH & MI) are God-fearing, law abiding pedestrians, but many also have a little “greed” in their vocabulary.
Yes, there needs to be a good whoopin' on the housing asset bubble, and certainly the sellers of assets (institutions and home owners) are not getting "bailed out" without bearing a cost. Bernake is trying to thread a needle with his “hold to maturity pricing” statement – provide price support to get markets flowing again, but recognize that it comes with a tax payer cost. I also took it as some signaling that mark to market accounting in defunct markets is potentially problematic (which was tricky for him to state with Chris Cox sitting next to him). The difference between the market in the state when values were rising and today is that in the rising markets, markets are functioning (albeit somewhat irrationally, because the risk was not being priced right.) Now we have irrationality to a point where we are non-functioning.
Greenspan said -- "history has not been kind to protracted periods of low risk premiums." Smart statement – did he never recognize that low interest rates actually contribute to low risk premiums?
Paulson ought to be recognized as the Rudy Giuliani of this crisis.

Moody's, Fitch, S&P, SEC Are All Useless

Were you dialed into this past weekend's meetings from your Wisconsin gardin? Barclay's will pick up a significant number of the LEH employees and pay several billion to do so. Your broad brush slams of the agencies and the SEC are as abusive as naked short selling.

Primus Guaranty and the Viability of the CDPC Model

Nice analysis, but...

The Primus stock is suffering from a massive uncertainty discount and that is probably a good thing for the longs, because if the company had greater transparency, it could be trading much lower.

Just like when a company is being worked out, the devil is in the details -- and just like when understanding whether your RMBS is going to pay off, the painful process of understanding each MBS is critical.

You're homework really is quite extensive (and in my view commendable), but here's also my view of the #1 problem with Primus -- we don't know what's in this portfolio of exposures. From what I can tell, the company only discloses industry diversity and ratings diversity -- $23+ billion of notional on $800 million of equity – that’s 18bps of equity on notional – I would feel better with maybe 200bps. Most importantly, I would not touch this thing without more disclosures. Let’s pile on a serious flaw in the business model AND the muddied waters of GAAP accounting to make the problems even worse.

Fortunately for Primus, most exposures are represented by fundamental, corporate ratings, as opposed to ABS/structured ratings, which fly by a different set of rules (model and underlying rating dependent). With 13% of the portfolio written to "Financial Intermediaries", you can't help but wonder if some of that notional is the $120 billion of long-term debt on Lehman's books (or name your favorite overleveraged financial intermediary). Bonds such as these are being supported by a myriad of RMBS/CDO assets that may be on there way to suffering more losses.

Furthermore, on the business model point... Ask yourself: In order to ensure that I get paid when my bonds go bad, would I want my counterparty to be posting collateral or would I want them to NOT post collateral??? A 50T CDS market lives with posting collateral but Primus gets to not post collateral because its triple-A rated and meets some rating diversity and concentration tests??? Posting collateral has been a serious, as of now, life-saving governor on the CDS market. Primus is like the 5’ 1” Lithuanian lightweight women’s team playing against Labron and Kobie -- and Primus is playing with its pants down. One of these CDS players is not like the other...

Take lesson # whichever from the great credit meltdown of 2007 (and beyond) – be awfully careful how much weight is placed on credit ratings for investment decisions.