Who's Gaining from the AIG Unwinds?

Tyler Durden has a scary post up, connecting banks' profitability in January and February to the fact that those were the months when AIG Financial Products was unwinding an enormous number of its contracts en masse. These trades, initiated by AIGFP, were allegedly enormously profitable for the biggest banks in the CDS market:

The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever"...
I can only guess/extrapolate what sort of PnL this put into the major global banks... I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

If this is true, then (a) the banks still aren't anywhere near sustainable profitability, and (b) those AIG retention bonuses -- paid on the grounds that only the people who got AIG into this mess could get it out -- are even more egregiously untenable than we had suspected.

The whole point of having the government take over AIG was that it wouldn't need to enter into panicked unwinds. If it went ahead and did that anyway, the levels of competence and oversight at AIG are even lower than most of us had thought. Which is quite an achievement.

Comments

[Xsander]

These positions are not marked down to reflect the probability of default of the counterparty because they are backed by collateral agreements. Every day the change in market value leads to a recalculation of the collateral required. The maximum loss is the loss that would be incurred if the counterparty could not meet the inter-day margin call resulting from a change in value of the asset. The potential inter day value change is not such a high number when it comes to CDOs and the likes, they do not go into overnight default like a single name default swap could.

[I am not a number..]

P-O-N-Z-I- ?

On Mar 30 09:04 AM wakeup call wrote:

> I'm not a derivatives expert but I would have thought that the CDSs
> would have been written down on a mark to market basis based on the
> probability of AIG not being able to make good on the contracts.
> At the point that a bank received 100% in cash there would be a large
> gain over the written down amounts which would have shown up in their
> January and February P & Ls.

[gina2359093]

not if they received more money than the market price ...which is the point of the story.

On Mar 30 08:18 AM Xsander wrote:

> Any profits banks made from the unwinding of derivatives with AIG
> would have already been in their p/l as these positions are all marked
> to market daily. If they were in the money they now hold cash as
> a result of the unwind whereas before they were holding collateral
> against the positive mark to market.

[Augustus]

IF the story is rue, it still has little to say about the AIG-FP employees.

The employees put on the book of businees at the direction of the overlords. They were directed to increase the amount of CDS or insurance outstanding and generte more premium.
Likewise with the unwinding. The overlords at Treasury who are directing this company, and with very little real knowledge of the business, have ordered the winding down and close out. Certainly it would change the prices for this stuff in an illiquid market. The traders carrying out the policy are not the problem.

[Mark Bern, CFA]

Isn't this why the Chinese have made overtures to advance an alternative to the US$ as the global reserve currency? When they see what our guys are getting away with, one can only imagine their desire to get a piece of the action in the future. The first step is to replace the US$.

Of course, their primary motive is probably more transparent: they don't like their odds of getting enough interest on their Treasuries to offset their likely future capital losses. As they look forward, continuing to buy US T-bonds is not as appealing as it once was.

But if they are successful in removing the US$ from its reserve status, they will suffer significant losses on their current portfolio. What a conundrum!

[Alan Young]

It's not just the US taxpayers who are getting screwed; it's holders of US Treasury bonds (and probably all other long-term, dollar-denominated bonds). Because as all this new Treasury debt gets turned into money, it won't be long before the value of US $$ takes a dive and interest rates go up.

[Charles A. Smith]

Hey, at least the dough pumped into AIG is buying us SOMETHING!!!

[Lilguy]

Transparency! We need it now!

Both the USG in the form of Treasury and the Fed as well as the financial sector have done nothing but try to hide the trading and investment actions and the values of their assets since this crisis began.

Now, apparently, they are all dealing with each other in massive insider deals that essentially rape the American taxpayer. But who's going to know if no one except these insiders can actually see the transactions among them?

The American public needs and deserves absolute transparency of the actions of the government that is suppose to advance its interests. If that occurs, the government will be less willing to make these horrendous, self-serving bailouts at taxpayers' expense, and progress can be made on a rational, balanced approach to rebuilding the financial marketplace. Until that happens, however, we will just be stumbling along, doling out trillions of taxpayer dollars to billionaires who either deliberately or through utter stupidity drove the financial sector into this massive hole.

[prudentinvestor]

Sounds like the AIG bonuses were to retain guys who can funnel taxpayers' money through the AIG conduit in various directions and in subtle ways. I suspect they will get highly rewarding "jobs" at the banks now receiving their largesse.

[John Slater]

All of the Fed's and Treasury's actions are calculated to promote the survival of the big four banks. Geithner's answer is that we have to salvage these banks to restore the securitization markets. No one seems willing to ask the question of whether this is a good thing.

[wakeup call]

I'm not a derivatives expert but I would have thought that the CDSs would have been written down on a mark to market basis based on the probability of AIG not being able to make good on the contracts. At the point that a bank received 100% in cash there would be a large gain over the written down amounts which would have shown up in their January and February P & Ls.

[Xsander]

Any profits banks made from the unwinding of derivatives with AIG would have already been in their p/l as these positions are all marked to market daily. If they were in the money they now hold cash as a result of the unwind whereas before they were holding collateral against the positive mark to market.