What are the Chinese going to do? Stop buying treasuries? They’re switched to short-term T-Bills, but they need the currency peg to keep subsidizing their export economy. And if they’re not hungry for Treasuries, the rest of the world is looking for safe money. They’d be pissed if we have hyperinflation, but they have more to lose if we break up Chimerica. As bad as it looks here, it looks a lot worse everywhere else.
Pretty much.
Something most American’s either don’t know or don’t understand…bad as it is here it’s a hell of a lot worse in a lot of other countries. My sister is in Ireland and according to her the economy seems to be completely melting down. She is actually scared and is considering moving back to the US at this point because things are getting so bad there.
-XT
Following up on previous post from TPM…
http://www.talkingpointsmemo.com/archives/2009/03/another_view_1.php
Summarized for the lazy…
The pros already have a pretty good idea about who’s got what, and all this maneuvering just gives them time to save their sorry assets.
Even during the GREAT depression of 1929-1930something, the USA was still far better off that most other countries.
Ireland, specifically, has been screwed for a while. Ever since Dell announced they were moving out?
Well among other things, AIG insures the pensions of retired german workers. So take heart American taxpayers-know that your taxes are going to support Herman and Hilda, as they retire to the South of France (at the age of 53), with full medical insurance!
You American fools will be bagging groceries at Publix, at the age of 75, while Herman and Hilda relax in the sun!
If AIG is the de facto FDIC of European banks, are European governments kicking in to save them as well? I’ve seen articles of other governments saving their banks but are they trying to save AIG like we are?
Is the US bailing out European insurers?
What this tells us, I guess, is that when the economy is not in a downturn, everything’s fine. In other words, AIG gets monthly premiums for credit protection (insurance). However, when the bad times hit, the payouts start increasing in a domino effect fashion.
What happened in corporate defaults insurance world can be described as sudden increase in civilian population deaths that causes insurance companies to pay out huge amounts at one point in time under life insurance contracts. However, their premium to payout ratio was determined for peaceful times probabilities and not for say, war times. For example, 9/11 has caused great payouts to be made by insurers when compared to usual business but not to the extent that they couldn’t sustain.
What’s happening now is that suddenly there’s 10 or 20 9/11 scale of events in the corporate world. And they are still bleeding.
Seems to me that to stop the bleeding Government should help companies to stay afloat (i.e. not to resort to bankruptcy) rather than piling up public debt to payout insurance when they do. It is not just the loss of the monies for payouts but also loss of thousands of jobs that compounds the problem.
But then again, I may be wrong…
To be perfectly honest, I don’t know. Are the European insurers the de facto FDIC for American banks?
I think you’re right up to that last paragraph. I don’t think it’s the companies going under that’s causing the problem - it’s the investments going under that’s triggering the payouts on the credit-default policies. Or am I the one that’s wrong here…
Well, my understanding of the credit default swap is that essentially the credit protection seller (AIG) insures some credit protection buyer (BoA) portfolio (e.g. corporate loans or some well-defined subset of it). The contract says that if a certain credit event occurs - a bankruptcy of some counterparty (e.g. GE) in the credit protection buyer (BoA) loan portfolio - credit protection seller (AIG) will take care of the remaining balance (insurance payout) thus credit protection buyer (BoA) has no loss.
Now, going back to my previous post last paragraph, instead of Government putting up the money to credit protection seller to stay afloat by footing the insurance payout, why not helping counterparty not to default. It might actually cost less.
Similar to handling of the sub-prime mortgage defaulting. The reason Mortgage Backed Securities are “toxic” is because cancer was allowed to reach a point of no return; i.e. we are counting days until death rather than counting days until full recovery. Yes, “cancer treatment” would be costly but certainly not at this rate.
But then again, what do I know…
Hmmmm.
maybe we can all move to Germany when the time is right?
Guten Tag.
Wie gehts?
Gut? Ja, sehr gut.
Wouldn’t that be the actual FDIC?
Oh. Well how evil can they be if the are involved with the Germans?
<sigh> These bailouts get tiresome just to hear about. Why can’t we just nationalize AIG for a hundred years and then release them. It worked for the USPS, right? Right?
Then which bankruptcies have triggered the insurance payouts? I figure Lehman has definitely caused some problems, but AIG was in trouble before Lehman collapsed. I’m pulling the credit default swap definition from a US Commodities Futures Trading Commission website (emphasis mine):
The 2 trillion dollar question: What are the specific credit event(s) that trigger payment? Is it related to the value of the derivatives (ie, the complaints about mark-to-market), or like you say, bankruptcy of portions of the portfolio? Or both?
My biggest problem with all of this is that conceptually, it’s all just numbers on a spreadsheet. To me it just seems like monopoly money. These credit default swaps are based on practically nothing. They started out very small and ended up huge based on nothing but speculation, with nothing backing them. I’m convinced there’s a simple way to return what started out as nothing, back to nothing while pissing off a very small number of people by breaking some rules of accounting and suspending assumptions/consequences about profits and losses for 3-6 months - but maybe that’s impossible and I’m just being naive.
Damn right! BTW, where did I put those launch codes?
I suspect that it’s the collateral requirements that have caused many of the problems at AIG. Let’s say I sell you a credit default swap, so I’ll pay you if, say, GE defaults, and you pay me a monthly premium.
When I sell the CDS, GE spreads (how much I charge you for the protection) are, say, 0.50%. Now, if the market thinks that GE is in trouble, that spread may move out to 1%. However, I’m still only collecting 0.50% from you. Now, that swap is worth some money, and you don’t necessarily believe I will have the ability to pay, even if I’m AAA rated, so I have to put some money up as collateral, in case I need to pay in the event of GE’s default.
Of course, I don’t have all of this collateral just hanging around, so I have to raise capital to post it, or borrow money, or something.
In AIG’s case, not only did credit spreads widen all over the place (causing them to post collateral), but they got downgraded. If I’m your counterparty, I may accept less collateral from you when you’re AAA than when you’re A-. So, at the same time that market spreads were widening, AIG’s rating was under pressure, causing a double-whammy.
In order to post all of that collateral, AIG had to raise capital or borrow money, putting even more pressure on the rating, and the spiral continued.
AIG was depending on its rating (AAA, in the old days) to issue the swaps that it did. Many people thought that their rating was binary – they were OK as long as they were AAA, but if they got downgraded, they would basically do a death spiral.
That’s different than other, non-financial companies – a retailer doesn’t depend on its rating to survive (though higher ratings give it lower costs, of course). Even GE can survive without its AAA rating, since it also makes jet engines, light bulbs, television shows, etc. However, the GE Capital arm could be badly hurt by the recent downgrade.
AIG really couldn’t survive without it.