In the "AIG: Inquiring Minds Want To Know" I asked the rather pertinent question regarding AIG's expected request for "more bailout" - who has been bailed out thus far?
Well, Bloomberg answered some of that question today:
The insurer made $18.7 billion in payments tied to swaps in the three weeks after AIG’s Sept. 16 bailout, according to another person familiar with the situation. The largest recipients were Societe Generale SA, which got $4.83 billion, Goldman Sachs Group Inc. with $2.97 billion, Deutsche Bank AG with $2.92 billion, Calyon Securities with $1.89 billion and Merrill Lynch & Co. with $1.32 billion, the person said.
So let me see if I got this right.
The United States Taxpayer covered bad bets that Goldman Sachs, SocGen, Deutsche, Calyon and Merrill made?
Now why do I call these "bad bets"?
Because these firms knowingly and willfully failed to perform margin supervision nightly on AIG as their counterparty, they failed to provide their own supervision, and since they knowingly took this position aware of the lack of a central counterparty and systemic margin supervision they are the ones who are responsible for doing so.
Having not done so, having been derelict in their responsibility to supervise the margin capacity of their own counterparties to these swaps, and as a direct consequence finding themselves with a potentially worthless contract we now as taxpayers are told by subterfuge that we must bail out AIG to prevent "systemic damage."
Why do I say derelict? Gee, how long do you think that Goldman (or any of these other firms) will let one of their hedge fund clients go without marking their assets "to the market"? Their traders are in the S&P pit every day - how often do they have to mark their positions to the market? (nightly)
Are CDS quoted in various places? Yep. So how long would a properly diligent party let an OTC counterparty go when a position they hold moves against that counterparty before insisting that they prove up capital adequacy to pay at the current mark?
Why would it not be nightly, when it is for every exchange-traded instrument in existence and these instruments are quoted - they're not "marked to model".
The simple fact of the matter is that this is exactly akin to someone playing with gasoline inside their living room, spilling it all over the place, having it catch fire and then being*****ed off when the fire department isn't there within 30 seconds to put it out.
Let me be perfectly clear - I don't care who wants to trade with whom, provided that I as a taxpayer are not called to bail them out when they fail to supervise their positions.
Since it is now clear that none of these firms will (or can) perform their own supervision of these positions there is only one answer that will work to prevent this sort of systemic damage: The trading of CDS contracts off a regulated exchange sans a central counterparty must be banned as a matter of federal law.
I have argued for over a year that "private" (over the counter) CDS are an open invitation to abuse, are unsound in the first instance, encourage and overlook fraud (the willful writing of swaps you have no hope of being able to cover) and are impossible to supervise adequately, despite the protests of the ISDA and others.
We now have proof - I'm right and they're wrong.
How do we accomplish draining this swamp and putting a stop to the abuses, malfeasance and misfeasance?
Go read the previous Ticker.
This must be enacted into law, and it must be done now.
PS: Bloomberg "edited" their story linked above and removed the detail cited; too bad I got it before they did it! Heh Bloomberg - this sort of nonsense forces me to call on your "reporting", and further forces me to ask: who twisted your arm?
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
Market Ticker content may be reproduced or excerpted online provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media.
Submissions may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.
Leads on stories of current economic and political interest are always welcome. Our fax tip line is 850-897-9364; please include contact information with your transmission.