Long and technical, but I think this gets at the heart of it: AIG: before CDS there was Reinsurance. Shorter version: AIG wasn't mismanaged, and they didn't merely "assume too much risk"; AIG was a criminal enterprise.
I am so mad about all of this. I actually feel more helpless now then in the run up to the Iraq war. At least war is something people can sort of understand. Credit default swaps are not going to be groked by the general public. The Obama administration is obviously in the pocket of the financial sector (could it be otherwise?) And nothing is going to be done about the largest theft in the history of the world. The measly two trillion or so we wasted in Iraq is nothing compared to this.
wow
but war kills
be happy bro
scary
One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.
Let’s say that an insurer needs to enhance its capital surplus by $100 million in order to meet regulatory capital requirements. They can enter into what appears to be a completely legitimate form of reinsurance contract, an agreement that appears to transfer the liability to the reinsurer. By doing so, the “ceding company” - an insurance company that transfers a risk to a reinsurance company - gets to drop that $100 million in liability and its regulatory surplus increases by $100 million.
The reinsurer assuming the risk does actually put up the $100 million in liability, but with the knowledge that they will never have to actually pay out on the contract. This is good for the reinsurer because they are paid a fee for this transaction, but it is bad for the ceding company, the insurer with the capital shortfall, because the transaction is actually a sham, a fraud meant to deceive regulators, counterparties and investors into thinking that the insurer has adequate capital. Typically the fee is 6% per year or what is called a “loan fee” in the insurance industry.
When it operates in this fashion, the whole reinsurance industry could be described as a “surplus rental” proposition, whereby an insurer literally loans another insurer capital in the form of risk cover, but with a secret understanding in the form of a side letter that the loan will be reversed without any recourse to the seller of protection. You give me $6 million in cash today, and I will give you a promise that we both know I will never honor.
Does this sound familiar? What our contacts in the insurance industry describe is almost a precise description of the CDS market, albeit one that evolved in the reinsurance industry literally decades ago and has been the cause of numerous insurance insolvencies and losses to insured parties. Or to put it another way, maybe the inspiration for the CDS market - at least within AIG and other insurers — evolved from the reinsurance market over the past two decades
A global depression will kill too. On a massive scale.
This article is getting linked everywhere. I'd like to think that is a good thing, but Atrios is no doubt correct: But, to some degree, it [the ritholtz article] doesn't really matter except for those of us who like to get outraged by these things. However this situation came about, the powers that be are most interested in preserving the institutions most responsible for it. Why that is I do not know, but that's where we are.
are we headed for a global depression??
That seems unlikely to me. But I think it's worse than typical. I know people who are seeing signs that the bottom may have been found. Don't know about that. It could be a long U-shaped bottom.
My hobby is an expensive one that is a luxury people can live without. People are still racing. I'm sure people are still sailing, going skiing, eating out, etc. But less often, and on a smaller scale. So there's some money lubricating the economy. My understanding of the Depression is that money just dried up, which led to a collapse of commerce.
i hear from friends the rental and sales in the east end of long island are slower than usual this time of year but not dead, were off to Rincon and they said "the season" which offically ends in 2 weeks was fine......but if we have a "currency bubble" bust or a "bond market bust" than we would sink lower so I have read not that i understand
As Crisis Loomed, Geithner Pressed But Fell Short
Before Timothy Geithner became Treasury chief, he regulated major U.S. banks. Now he says: "We're having a major financial crisis in part because of failures of supervision."
partnoy: derivative dangers / on fresh air a couple of weeks ago
[This turned out to be too long without really saying anything. But I'll just post anyway. Most likely not worth the effort though.]
"...It could be a long U-shaped bottom..."
Or, worse, it might be an L. But yes, I'm probably overly pessimistic. Certainly so for my level of training (i.e., I don't really know what I'm talking about, I've just been reading a lot recently.) I'm basing my extremely negative forecasts mostly on an intuition about the types of personalities who got us into this, and who have, strangely, also been charged with getting us out.
This is similar to my basis for opposing the Iraq war. If they could have done it, and actually made the life of Iraqis better, and had democracy spread like toppling dominoes across the entire region, then I probably could have overlooked the problematic international legal situation of attacking a sovereign nation. But I knew that wouldn't work because it was clear the people in charge of the decisions were either incredibly dumb (Bush) or focused exclusively on enriching themselves and friends in the defense industry (Cheney.) And it was clear that it would never work out for that reason.
Similarly, in terms of the economic situation, I think - ignoring the people in charge at the moment - that a global depression is very unlikely. I mean, come on, it hardly ever happens. But with Summers, Bernanke, Geithner, et. al. in charge (i.e., with Wall St. in charge,) do we really think any good decisions are going to be made? All decisions will be aimed at protecting their (or their friends) fuck ups and / or outright criminal activity that produced the problems in the first place.
How much fraud was there? That's the question the markets are waiting to have answered before they can restart. But no one knows. How far did, say, Cassano go? To me that's like asking "How evil is Dick Cheney?" There's no good answer here. I think the corporate culture on Wall St. allowed some of these people to go completely off the reservation. It's just a wild guess, but somehow I feel sure that we're only just beginning to understand the amounts involved. It's not a "couple of trillion dollars". I think it's *way* more. I think it's so much that these people have scared the shit out of Obama. No one can bring them to justice, and no one really wants to get at the root of the problem, because the answers are all "we're fucked." So they are just pumping more money in, trying to keep the shell game afloat because that might be the best answer at this point.
But I just don't think it's going to work. Eventually the fraud (or "toxic assets" if you like) will have to be brought to light.
China (and Japan) are what keeps us afloat now by buying our treasury bonds. Luckily (?) for us, they can't really stop buying them because where are they going to park their money? Europe is fucked too. Everyone is fucked. That's the strongest argument against a total meltdown at this point. But I don't buy it any more.
China doesn't have to stop buying. They just have to tell Ben "we're not going to buy at the next auction unless we get better interest rates." Ben can say "I don't believe you", but who's got the better negotiating position there? Ben is going to be forced to raise rates. The Fed does not control interest rates, the bond markets control interest rates. And once he raises those rates, all rates for borrowing money go up. And then the already seriously damaged economy really does grind to a halt. And once the U.S. economy goes down, the whole world follows.
I suppose there must be back channel negotiations going on with the Chinese, so who knows, maybe they'll work it out. The global economies are so interconnected that even strategic adversaries (like China and the U.S.) don't want to provoke each other to fail. But that's not to say that China isn't going to try to get everything they can out of us. And they're in a position to do it. If you were the Chinese would you trust Geithner? Would you think Wall St is acting in good faith? Would you think there is any transparency in the U.S. market? Without that you have no functioning market.
I think we're going to fall a lot further (say, pulling numbers out of my hat, something like: DOW at 4500, S&P at 500, unemployment at 17%.) Whether it's technically a global depression or not doesn't matter a whole lot. The question is, how long will we be down before we can recover. Forcing the bad debt out into the open (and prosecuting the fraud) will speed recovery by providing the assuredness of transparency (and fairness) that the financial markets need. This is our fastest path towards recovery. It can't stop the meltdown, but nothing can at this point. Leaving these jokers in charge, transferring trillions in tax payer money to cover up the bad debt (and not prosecuting the Cassanos of the world) is just delaying recovery while at the same time wasting the money that might be used to recover.
greenwald
"Brooksley Born" (via the greenwald link) that's who I was trying to remember in my post. Crazy stuff.
Go Elizabeth Warren! That's exactly what needs to be done. A congressional panel overseeing the U.S. financial rescue suggested that getting rid of top executives and liquidating problem banks may be a better way to solve the economic crisis.
The Congressional Oversight Panel, in a report released yesterday, also said the Treasury may be relying on too rosy an economic scenario to guide its $700 billion bailout, and declared that the success of the program after six months is “mixed.” Three of the group’s members disagreed with at least some of the findings.
“All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets,” the panel, headed by Harvard Law School Professor Elizabeth Warren, said in its report. Of course, not everyone agrees:Two of the panel members, New York State Superintendent of Banks Richard Neiman and former New Hampshire Senator John Sununu, issued separate findings.
“We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan,” the two wrote. I think the "concern" here is central to the trouble we're having getting out of the mess. There is an idea floating around that the markets are all psychologically driven. In this case the worst thing you can do is to admit to the enormity of the problem, because this will destroy investor confidence, which will then tank the market. And okay, there is something to that I think. But c'mon! You think big investors aren't looking at the fundamentals and are just going on gut instinct? People have lost confidence in the market because the numbers needed to instill confidence are not available (because of things like level 3 assets and total fantasy land mark to model valuations.) But the truth does exist (all these assets could be valued, and we could figure out what these companies are really worth,) and until we do that no amount of "positive thinking" is going to fix things. Sununu and Neiman might be positive that it is incorrect to imply that the banks are insolvent, but they should share their numbers if they are so positive, because no one else has these numbers! Of course they don't either, they are just figuring that if they really believe it hard enough it will be the case. Remind you of anything else? Iraqis greeting us with flowers? The insurgency is on it's last legs? Nothing but a bunch of dead enders? If only people would believe we wouldn't have to do any hard work...
Thankfully people like Elizabeth Warren are doing the hard work.
((thanks JIM:>))
I think we're going to fall a lot further (say, pulling numbers out of my hat, something like: DOW at 4500, S&P at 500, unemployment at 17%.) Whether it's technically a global depression or not doesn't matter a whole lot. The question is, how long will we be down before we can recover. Forcing the bad debt out into the open (and prosecuting the fraud) will speed recovery by providing the assuredness of transparency (and fairness) that the financial markets need. This is our fastest path towards recovery. It can't stop the meltdown, but nothing can at this point. Leaving these jokers in charge, transferring trillions in tax payer money to cover up the bad debt (and not prosecuting the Cassanos of the world) is just delaying recovery while at the same time wasting the money that might be used to recover.
((i hope your not good at predictions:>))
aapl 130 by friday, dow 9000 by may......:>)
Pre-Market: 120.25 +0.68 (0.57%) Apr 13 4:46am ET
|
I am so mad about all of this. I actually feel more helpless now then in the run up to the Iraq war. At least war is something people can sort of understand. Credit default swaps are not going to be groked by the general public. The Obama administration is obviously in the pocket of the financial sector (could it be otherwise?) And nothing is going to be done about the largest theft in the history of the world. The measly two trillion or so we wasted in Iraq is nothing compared to this.
- jim 4-02-2009 3:33 pm
wow
but war kills
be happy bro
- Skinny 4-02-2009 5:17 pm [add a comment]
scary
One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.
Let’s say that an insurer needs to enhance its capital surplus by $100 million in order to meet regulatory capital requirements. They can enter into what appears to be a completely legitimate form of reinsurance contract, an agreement that appears to transfer the liability to the reinsurer. By doing so, the “ceding company” - an insurance company that transfers a risk to a reinsurance company - gets to drop that $100 million in liability and its regulatory surplus increases by $100 million.
The reinsurer assuming the risk does actually put up the $100 million in liability, but with the knowledge that they will never have to actually pay out on the contract. This is good for the reinsurer because they are paid a fee for this transaction, but it is bad for the ceding company, the insurer with the capital shortfall, because the transaction is actually a sham, a fraud meant to deceive regulators, counterparties and investors into thinking that the insurer has adequate capital. Typically the fee is 6% per year or what is called a “loan fee” in the insurance industry.
When it operates in this fashion, the whole reinsurance industry could be described as a “surplus rental” proposition, whereby an insurer literally loans another insurer capital in the form of risk cover, but with a secret understanding in the form of a side letter that the loan will be reversed without any recourse to the seller of protection. You give me $6 million in cash today, and I will give you a promise that we both know I will never honor.
Does this sound familiar? What our contacts in the insurance industry describe is almost a precise description of the CDS market, albeit one that evolved in the reinsurance industry literally decades ago and has been the cause of numerous insurance insolvencies and losses to insured parties. Or to put it another way, maybe the inspiration for the CDS market - at least within AIG and other insurers — evolved from the reinsurance market over the past two decades
- Skinny 4-02-2009 5:22 pm [add a comment]
A global depression will kill too. On a massive scale.
- jim 4-02-2009 5:33 pm [add a comment]
This article is getting linked everywhere. I'd like to think that is a good thing, but Atrios is no doubt correct:
- jim 4-02-2009 5:53 pm [add a comment]
are we headed for a global depression??
- Skinny 4-03-2009 12:55 am [add a comment]
That seems unlikely to me. But I think it's worse than typical. I know people who are seeing signs that the bottom may have been found. Don't know about that. It could be a long U-shaped bottom.
My hobby is an expensive one that is a luxury people can live without. People are still racing. I'm sure people are still sailing, going skiing, eating out, etc. But less often, and on a smaller scale. So there's some money lubricating the economy. My understanding of the Depression is that money just dried up, which led to a collapse of commerce.
- mark 4-03-2009 6:50 am [add a comment]
i hear from friends the rental and sales in the east end of long island are slower than usual this time of year but not dead, were off to Rincon and they said "the season" which offically ends in 2 weeks was fine......but if we have a "currency bubble" bust or a "bond market bust" than we would sink lower so I have read not that i understand
- Skinny 4-03-2009 8:34 am [add a comment]
As Crisis Loomed, Geithner Pressed But Fell Short
Before Timothy Geithner became Treasury chief, he regulated major U.S. banks. Now he says: "We're having a major financial crisis in part because of failures of supervision."
partnoy: derivative dangers / on fresh air a couple of weeks ago
- bill 4-03-2009 1:46 pm [add a comment]
[This turned out to be too long without really saying anything. But I'll just post anyway. Most likely not worth the effort though.]
"...It could be a long U-shaped bottom..."
Or, worse, it might be an L. But yes, I'm probably overly pessimistic. Certainly so for my level of training (i.e., I don't really know what I'm talking about, I've just been reading a lot recently.) I'm basing my extremely negative forecasts mostly on an intuition about the types of personalities who got us into this, and who have, strangely, also been charged with getting us out.
This is similar to my basis for opposing the Iraq war. If they could have done it, and actually made the life of Iraqis better, and had democracy spread like toppling dominoes across the entire region, then I probably could have overlooked the problematic international legal situation of attacking a sovereign nation. But I knew that wouldn't work because it was clear the people in charge of the decisions were either incredibly dumb (Bush) or focused exclusively on enriching themselves and friends in the defense industry (Cheney.) And it was clear that it would never work out for that reason.
Similarly, in terms of the economic situation, I think - ignoring the people in charge at the moment - that a global depression is very unlikely. I mean, come on, it hardly ever happens. But with Summers, Bernanke, Geithner, et. al. in charge (i.e., with Wall St. in charge,) do we really think any good decisions are going to be made? All decisions will be aimed at protecting their (or their friends) fuck ups and / or outright criminal activity that produced the problems in the first place.
How much fraud was there? That's the question the markets are waiting to have answered before they can restart. But no one knows. How far did, say, Cassano go? To me that's like asking "How evil is Dick Cheney?" There's no good answer here. I think the corporate culture on Wall St. allowed some of these people to go completely off the reservation. It's just a wild guess, but somehow I feel sure that we're only just beginning to understand the amounts involved. It's not a "couple of trillion dollars". I think it's *way* more. I think it's so much that these people have scared the shit out of Obama. No one can bring them to justice, and no one really wants to get at the root of the problem, because the answers are all "we're fucked." So they are just pumping more money in, trying to keep the shell game afloat because that might be the best answer at this point.
But I just don't think it's going to work. Eventually the fraud (or "toxic assets" if you like) will have to be brought to light.
China (and Japan) are what keeps us afloat now by buying our treasury bonds. Luckily (?) for us, they can't really stop buying them because where are they going to park their money? Europe is fucked too. Everyone is fucked. That's the strongest argument against a total meltdown at this point. But I don't buy it any more.
China doesn't have to stop buying. They just have to tell Ben "we're not going to buy at the next auction unless we get better interest rates." Ben can say "I don't believe you", but who's got the better negotiating position there? Ben is going to be forced to raise rates. The Fed does not control interest rates, the bond markets control interest rates. And once he raises those rates, all rates for borrowing money go up. And then the already seriously damaged economy really does grind to a halt. And once the U.S. economy goes down, the whole world follows.
I suppose there must be back channel negotiations going on with the Chinese, so who knows, maybe they'll work it out. The global economies are so interconnected that even strategic adversaries (like China and the U.S.) don't want to provoke each other to fail. But that's not to say that China isn't going to try to get everything they can out of us. And they're in a position to do it. If you were the Chinese would you trust Geithner? Would you think Wall St is acting in good faith? Would you think there is any transparency in the U.S. market? Without that you have no functioning market.
I think we're going to fall a lot further (say, pulling numbers out of my hat, something like: DOW at 4500, S&P at 500, unemployment at 17%.) Whether it's technically a global depression or not doesn't matter a whole lot. The question is, how long will we be down before we can recover. Forcing the bad debt out into the open (and prosecuting the fraud) will speed recovery by providing the assuredness of transparency (and fairness) that the financial markets need. This is our fastest path towards recovery. It can't stop the meltdown, but nothing can at this point. Leaving these jokers in charge, transferring trillions in tax payer money to cover up the bad debt (and not prosecuting the Cassanos of the world) is just delaying recovery while at the same time wasting the money that might be used to recover.
- jim 4-04-2009 6:31 pm [add a comment]
greenwald
- dave 4-05-2009 6:00 am [add a comment]
"Brooksley Born" (via the greenwald link) that's who I was trying to remember in my post. Crazy stuff.
- jim 4-05-2009 1:01 pm [add a comment]
Go Elizabeth Warren! That's exactly what needs to be done.
Of course, not everyone agrees:I think the "concern" here is central to the trouble we're having getting out of the mess. There is an idea floating around that the markets are all psychologically driven. In this case the worst thing you can do is to admit to the enormity of the problem, because this will destroy investor confidence, which will then tank the market. And okay, there is something to that I think. But c'mon! You think big investors aren't looking at the fundamentals and are just going on gut instinct? People have lost confidence in the market because the numbers needed to instill confidence are not available (because of things like level 3 assets and total fantasy land mark to model valuations.) But the truth does exist (all these assets could be valued, and we could figure out what these companies are really worth,) and until we do that no amount of "positive thinking" is going to fix things. Sununu and Neiman might be positive that it is incorrect to imply that the banks are insolvent, but they should share their numbers if they are so positive, because no one else has these numbers! Of course they don't either, they are just figuring that if they really believe it hard enough it will be the case. Remind you of anything else? Iraqis greeting us with flowers? The insurgency is on it's last legs? Nothing but a bunch of dead enders? If only people would believe we wouldn't have to do any hard work...Thankfully people like Elizabeth Warren are doing the hard work.
- jim 4-08-2009 6:29 pm [add a comment]
((thanks JIM:>))
I think we're going to fall a lot further (say, pulling numbers out of my hat, something like: DOW at 4500, S&P at 500, unemployment at 17%.) Whether it's technically a global depression or not doesn't matter a whole lot. The question is, how long will we be down before we can recover. Forcing the bad debt out into the open (and prosecuting the fraud) will speed recovery by providing the assuredness of transparency (and fairness) that the financial markets need. This is our fastest path towards recovery. It can't stop the meltdown, but nothing can at this point. Leaving these jokers in charge, transferring trillions in tax payer money to cover up the bad debt (and not prosecuting the Cassanos of the world) is just delaying recovery while at the same time wasting the money that might be used to recover.
((i hope your not good at predictions:>))
- Skinny 4-13-2009 10:36 am [add a comment]
aapl 130 by friday, dow 9000 by may......:>)
Pre-Market: 120.25 +0.68 (0.57%) Apr 13 4:46am ET
- Skinny 4-13-2009 10:38 am [add a comment]