Bank failure(s) - Page 3

oldfogey · 09-25-2008, 10:47 AM

A credit default swap is an insurance policy (written by AIG in this case) in case a borrower (say Lehman) defaults. Say you own Lehman Brothers bonds and want to eliminate the risk of them defaulting (going bankrupt). You buy protection at a price, between 0.5% per annum and up to 20% per annum which you pay to the insurer. If default happens, you give the bonds to the insurer and they pay you back the 100 face value (or thereabouts) on your bond.

So, AIG had insured other banks and financial insitutions to the extent of $1trn dollars face value against particular institutions going bust. If AIG had gone bust, the insurance would have been void. The financial institutions who found themselves without cover would either have had to sell the underlying bonds at a loss (at totally distressed prices, even if the market were functioning, which it isn't); or try to replace the contract (paying a second premium again in a distressed market); raise capital to cover their increased risk as well as the loss; or go bankrupt.

deftones156 · 09-25-2008, 11:00 AM

Quote:

Originally Posted by CBRVFR

Wouldn't an excessive amount of that create an unstable balance sheet?

I have a hard time understanding big-business finance. All the small businesses I have known that took that approach are gone. Financial conservatism = survival at this 'micro' level, IMO.

That seems to be exactly what happened for many of these companies. Many of the bad/risky loans were rated quite high since when they were issued they had insurance attached to them. The insurance was a guarantee that they'd be paid back. Well, oops the housing bubble bursts, the market value of homes plummets and suddenly those vastly overvalued houses are worth less than what people owe on their mortgages.

Basically, as my coworker put it, these companies were playing blackjack, doubled down, and lost.

CBRVFR · 09-25-2008, 11:03 AM

OK, thanks - just read a NYT business section article about the things -

Apparently they started doing this in the late '90s...

Quote:

"The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small.
"As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized."
The market for the credit default swaps has been enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market. Also in sharp contrast to traditional insurance, the swaps are totally unregulated.
When the mortgage-backed securities that many swaps were supporting began to lose value in 2007, investors began to fear that the swaps, originally meant as a hedge against risk, could suddenly become huge liabilities.
The swaps' complexity and the lack of information in an unregulated market added to the market's anxiety. Bond insurers like MBNA and Ambac that had written large amounts of the swaps saw their shares plunge in late 2007.
Credit default swaps also played an integral role in the federal government's decision to bail out the American International Group, one of the world's largest insurers, in September 2008. The Federal Reserve concluded that if A.I.G. failed and defaulted on its swaps, throwing the liability for the insured securities onto the swaps' counterparties, the result could be a daisy chain of failures across the international financial system.

It's a bitter pill to have to expend the resources to rescue these fuckers. It's a stark realization that the government allowed the risk to become so great that our whole economic system became hostage to these greedy bastards.

It's like a bookie who took in more bets than he could pay. But they don't often do that, because they know that it will end in tears.

People should pay for this with their political and business lives, if not their actual ones.

SheepOfBlue · 09-25-2008, 11:10 AM

Quote:

Originally Posted by oldfogey

A credit default swap is an insurance policy (written by AIG in this case) in case a borrower (say Lehman) defaults. Say you own Lehman Brothers bonds and want to eliminate the risk of them defaulting (going bankrupt). You buy protection at a price, between 0.5% per annum and up to 20% per annum which you pay to the insurer. If default happens, you give the bonds to the insurer and they pay you back the 100 face value (or thereabouts) on your bond.

So, AIG had insured other banks and financial insitutions to the extent of $1trn dollars face value against particular institutions going bust. If AIG had gone bust, the insurance would have been void. The financial institutions who found themselves without cover would either have had to sell the underlying bonds at a loss (at totally distressed prices, even if the market were functioning, which it isn't); or try to replace the contract (paying a second premium again in a distressed market); raise capital to cover their increased risk as well as the loss; or go bankrupt.

I am missing something... If AIG is insuring against default and has $1trn insured then AIG goes bust. Why then does everyone have to sell bonds? If the underlying bond is not in default they still have an asset

Risk has increased but costs have decreased. So if they had invested soundly why could they not just sit on the bonds until things stabalize?

oldfogey · 09-25-2008, 11:38 AM

Quote:

Originally Posted by SheepOfBlue

I am missing something... If AIG is insuring against default and has $1trn insured then AIG goes bust. Why then does everyone have to sell bonds? If the underlying bond is not in default they still have an asset

Risk has increased but costs have decreased. So if they had invested soundly why could they not just sit on the bonds until things stabalize?

AIG is insuring other institutions, not obtaining it from someone.

If you've valued your insurance at market prices (as you must) and it suddenly becomes worthless, your assets decline. Lehmans debt went down to 25, then 10, then zero. Insurance would have gone to 75, then 90, then 100. Package stays at 100 until your counterparty defaults.

AIG's own subordinate debt has gone down to between 10 and 25% on the dollar, the government didn't rescue the shareholders nor the subordinate debt holders. Quite right, too.

oldfogey · 09-25-2008, 11:45 AM

Quote:

Originally Posted by deftones156

Basically, as my coworker put it, these companies were playing blackjack, doubled down, and lost.

No, it wasn't gambling anymore than engineering is gambling. They engineered a solution that was stable at 95% probability, but not at 99%. We're in a four to six standard deviation situation.

I've been in quite a few economic and market crises. Most of the financial engineers in the investment banks and credit agencies never have. They have PhD and MBA's, they understood the numbers. They don't have experience of the "fat tail" extremes.

I don't think you can equate that with playing double or quits.

SheepOfBlue · 09-25-2008, 11:48 AM

Quote:

Originally Posted by oldfogey

AIG is insuring other institutions, not obtaining it from someone.

If you've valued your insurance at market prices (as you must) and it suddenly becomes worthless, your assets decline. Lehmans debt went down to 25, then 10, then zero. Insurance would have gone to 75, then 90, then 100. Package stays at 100 until your counterparty defaults.

AIG's own subordinate debt has gone down to between 10 and 25% on the dollar, the government didn't rescue the shareholders nor the subordinate debt holders. Quite right, too.

Yep that was my question....

Say AIG is insuring me for my $1billion collection of bonds for Maplification. Well they go belly up but would not be the bonds I OWN still be valued the same? What has increased is the risk OI have for default on those bonds. Now there may not be a readily available insurer yet I have the bonds

So while AIG goes under I still have all my assets I started with and should be fine except a temporary blip in risk. So only the irresponsible party would be severely punished while a sound investor is still on track to invade Canada

with maybe a minor delay until next Maple season. Yes there is perturbation but those that had excessive risk are punished while the taxpayers are not. I really could give a crap about irresponsible companies and fail to see the dire emergency to those that are sound and responsible. It would seem to be the same as a recession in impact. Sorry I am still missing it I am sure.

SheepOfBlue · 09-25-2008, 11:49 AM

Also it seems THIS is what we are really buying

deftones156 · 09-25-2008, 12:27 PM

Quote:

Originally Posted by oldfogey

No, it wasn't gambling anymore than engineering is gambling. They engineered a solution that was stable at 95% probability, but not at 99%. We're in a four to six standard deviation situation.

I've been in quite a few economic and market crises. Most of the financial engineers in the investment banks and credit agencies never have. They have PhD and MBA's, they understood the numbers. They don't have experience of the "fat tail" extremes.

I don't think you can equate that with playing double or quits.

Though I agree with you to a certain extent--they weren't blindly gambling--they still were taking big gambles by taking on all those risky loans. They had to have known that if the market values steeply declined and many people defaulted on loans (that they shouldn't have had in the first place) they could be in a world of trouble. I'll amend my statement. I'll call it calculated gambling. But as CBRVFR pointed out, they got greedy, and in my opinion were far too short-sighted.

oldfogey · 09-25-2008, 12:36 PM

Sorry SoB, what does Buffett's decision have to do with AIG or the assets proposed for the new institution?

The point I was trying to get across about the CDS is that, as a package the bond plus insurance is worth 100 until the insurer defaults irrespective of how low the bond price gets. If the insurance goes belly-up, you are left with bonds worth perhaps 10% of face value, so you've lost 90% of your capital.

The fact that so many institutions (including money funds, banks, pension funds and insurance companies) depended in part on the AIG insurance was what made the AIG failure systemic, and therefore worth the government getting involved.

In a sense it's simple, if you are happy to have say 40% by value of the financial institutions in the US go bankrupt, together with the loan calls on homes, vehicle leases and credit cards that would result, plus say a 70% fall in all asset prices associated with this, then you've no need to think about providing capital.

If you think that by providing capital, this will be avoided and, by judicious buying and selling over five years the loan portfolio will make some excess profits for taxpayers at the same time, then you might support the bill before Congress.

oldfogey · 09-25-2008, 12:37 PM

Quote:

Originally Posted by deftones156

I'll call it calculated gambling. But as CBRVFR pointed out, they got greedy, and in my opinion were far too short-sighted.

That's capitalism for you.

CBRVFR · 09-25-2008, 01:01 PM

Grateful for the insight, OF.

Our problem is that pure free market capitalism without oversight on behalf of average American schlubs like us tends to put us all at the mercy of greedy, unprincipled, irresponsible jerks.

So you have one major party whose fringe loudmouths find any restrictions on the market philosophically abhorrent, and the other party whose fringe loudmouths think the very rich... shouldn't be.

The partisans who can't be bothered with research or accurate specificity (too elitist, I guess) attribute the 'other side' with the characteristics of the fringe loudmouths, and vote accordingly.

It becomes very difficult to achieve a balance of regulations that benefit most Americans, instead of a select, small voting bloc, or foreign investors.

As far as the ability of whomever will be looking after those portfolios to return a profit to the treasury, I'd point out that the Iraq war was supposed to be paid for in cheap oil by a grateful democratic Iraqi nation.

We're skeptical.

SheepOfBlue · 09-25-2008, 01:30 PM

Ah got you I was figuring a bond would be valued at face value not what you could sell if for today.

The Buffet article was that I am VERY afraid this is a bail out with my money of rich folks that took to much risk.

ONEvcs · 09-25-2008, 02:05 PM

Quote:

Originally Posted by SheepOfBlue

Ah got you I was figuring a bond would be valued at face value not what you could sell if for today.

The Buffet article was that I am VERY afraid this is a bail out with my money of rich folks that took to much risk.

I don't think they were taking too much risk. They were trying to take advantage of people with not enough income for the loans they were granting them. Taking advantage of people who did not have enough common sense or not enough knowledge to know better. And it blew in their face.

seamus · 09-25-2008, 09:21 PM

Quote:

Originally Posted by CBRVFR

...So you have one major party whose fringe loudmouths find any restrictions on the market philosophically abhorrent, and the other party whose fringe loudmouths think the very rich... shouldn't be...

I believe this statement is incorrect.

You have two major parties who find any restrictions on markets abhorrent based on their ties to those same markets. One party then preaches it and the other preaches against it.

The parties at their base are the same, they just go about buying votes differently.

SheepOfBlue · 09-25-2008, 10:03 PM

More folks making money: JPMorgan Chase buys WaMu assets after FDIC seizure: Financial News - Yahoo! Finance

oldfogey · 09-26-2008, 04:46 AM

So a private equity group put $7bn in to WaMu in April and loses all of that in the "rescue"; most of the bondholders lose their money; more folks losing money. The $1.9bn goes to the FDIC for their guarantee to depositors, i.e. payment to taxpayers for providing the guarantee.

"TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. "

SheepOfBlue · 09-26-2008, 07:46 AM

Quote:

Originally Posted by oldfogey

So a private equity group put $7bn in to WaMu in April and loses all of that in the "rescue"; most of the bondholders lose their money; more folks losing money. The $1.9bn goes to the FDIC for their guarantee to depositors, i.e. payment to taxpayers for providing the guarantee.

"TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. "

Bond holders invested money which has risk with the hope of return, taxpayers had it confiscated by force with the hope that even more won't be confiscated next time

CBRVFR · 09-26-2008, 10:47 AM

Which doesn't explain your prior post.

ND4SPD · 09-26-2008, 11:18 AM

Unrealistic, but it sounds nice.

Quote:

I'm against the $85 BILLION bailout of AIG. Instead, I'm in favor of
giving $85,000,000,000 to America in a "We Deserve It" dividend. To
make
the math simple, let's assume there are 200,000,000 bona fide U.S.
citizens, aged 18+ Our population is about 301 million counting every
man, woman , and child. So, 200,000,000 might be a fair stab at adults
18 and up.

Now, divide 200 million, 18+ adults into $85 billion - that equals
$425,000.00 each! Yes, my plan is to give that $425,000 to every adult
as a "We Deserve It" dividend. Of course, it would NOT be tax free.
So,
let's assume a tax rate of 30%. Everyone would pay $127,500.00 in taxes.
That sends $25.5 billion right back to Uncle Sam! It also means that
every adult 18+ has $297,500.00 in their pocket.

A husband and wife would have $595,000.00!

What would you do with $297,500.00 to $595,000.00?
· Pay off your mortgage – housing crisis solved
· Repay college loans – what a great boost to new grads
· Put away money for college – it'll really be there
· Save in a bank – create money to loan to entrepreneurs
· Buy a new car – create jobs
· Invest in the market – capital drives growth
· Pay for your parent's medical insurance – health care
improves
· Enable Deadbeat Parents to come clean – or else

Remember this is for every adult U.S. citizen, 18 and older (including
the folks who lost their jobs at Lehmann Brothers and every other
company that is cutting back) and of course, for those serving in our
Armed Forces.

If we're going to do an $85 billion bailout, let's bail out every adult
U.S. citizen!!

As for AIG – liquidate it.
· Sell off its parts.
· Let American General go back to being American General.
· Sell off the real estate.
· Let the private sector bargain hunters cut it up and clean it
up.

We deserve the money and AIG doesn't. Sure it's a crazy idea, but can
you imagine the coast-to-coast block party?!

How do you spell Economic Boom? W-e D-e-s-e-r-v-e I-t
d-i-v-i-d-e-n-d!

I trust my fellow adult Americans to know how to use the $85 Billion
"We Deserve It" dividend more than I do the geniuses at AIG or in
Washington, D.C. .

And remember, The plan only really costs $59.5 billion because $25.5
billion is returned instantly in taxes to Uncle Sam.

evl_twn · 09-26-2008, 11:38 AM

Quote:

Originally Posted by ND4SPD

Unrealistic, but it sounds nice.

Math FALE

85,000,000,000 / 200,000,000 = 425

MotoVegas · 09-26-2008, 12:06 PM

Quote:

Originally Posted by evl_twn

Math FALE

85,000,000,000 / 200,000,000 = 425

The REAL reason socialism doesn't work in the long run... they suck at math.

09-25-2008, 10:47 AM	#61
oldfogey Senior member Join Date: 12-14-2006 Location: St Albans, UK Age: 56 Bike(s): Honda VFR800i, BSA Posts: 1,250	A credit default swap is an insurance policy (written by AIG in this case) in case a borrower (say Lehman) defaults. Say you own Lehman Brothers bonds and want to eliminate the risk of them defaulting (going bankrupt). You buy protection at a price, between 0.5% per annum and up to 20% per annum which you pay to the insurer. If default happens, you give the bonds to the insurer and they pay you back the 100 face value (or thereabouts) on your bond. So, AIG had insured other banks and financial insitutions to the extent of $1trn dollars face value against particular institutions going bust. If AIG had gone bust, the insurance would have been void. The financial institutions who found themselves without cover would either have had to sell the underlying bonds at a loss (at totally distressed prices, even if the market were functioning, which it isn't); or try to replace the contract (paying a second premium again in a distressed market); raise capital to cover their increased risk as well as the loss; or go bankrupt. __________________ Blessed are the young for they shall inherit the national debt - Herbert Hoover

09-25-2008, 11:49 AM	#68
SheepOfBlue Your tax dollars at work Join Date: 12-18-2006 Location: Huntsville, AL Age: 46 Bike(s): CBR1000RR, RC51, VT500FT Posts: 6,867	Also it seems THIS is what we are really buying __________________ When the past is allowed to fade to nothing then only chaos is left.

09-25-2008, 12:36 PM	#70
oldfogey Senior member Join Date: 12-14-2006 Location: St Albans, UK Age: 56 Bike(s): Honda VFR800i, BSA Posts: 1,250	Sorry SoB, what does Buffett's decision have to do with AIG or the assets proposed for the new institution? The point I was trying to get across about the CDS is that, as a package the bond plus insurance is worth 100 until the insurer defaults irrespective of how low the bond price gets. If the insurance goes belly-up, you are left with bonds worth perhaps 10% of face value, so you've lost 90% of your capital. The fact that so many institutions (including money funds, banks, pension funds and insurance companies) depended in part on the AIG insurance was what made the AIG failure systemic, and therefore worth the government getting involved. In a sense it's simple, if you are happy to have say 40% by value of the financial institutions in the US go bankrupt, together with the loan calls on homes, vehicle leases and credit cards that would result, plus say a 70% fall in all asset prices associated with this, then you've no need to think about providing capital. If you think that by providing capital, this will be avoided and, by judicious buying and selling over five years the loan portfolio will make some excess profits for taxpayers at the same time, then you might support the bill before Congress. __________________ Blessed are the young for they shall inherit the national debt - Herbert Hoover

09-25-2008, 01:01 PM	#72
CBRVFR Godspeed, #20 Join Date: 12-13-2006 Age: 56 Bike(s): VFR750 SV650 TZ250 Posts: 5,260	Grateful for the insight, OF. Our problem is that pure free market capitalism without oversight on behalf of average American schlubs like us tends to put us all at the mercy of greedy, unprincipled, irresponsible jerks. So you have one major party whose fringe loudmouths find any restrictions on the market philosophically abhorrent, and the other party whose fringe loudmouths think the very rich... shouldn't be. The partisans who can't be bothered with research or accurate specificity (too elitist, I guess) attribute the 'other side' with the characteristics of the fringe loudmouths, and vote accordingly. It becomes very difficult to achieve a balance of regulations that benefit most Americans, instead of a select, small voting bloc, or foreign investors. As far as the ability of whomever will be looking after those portfolios to return a profit to the treasury, I'd point out that the Iraq war was supposed to be paid for in cheap oil by a grateful democratic Iraqi nation. We're skeptical. __________________ "...the TV also never took away the screwdriver and shoved it up the repairman's ass." Our own Mr.2nd Amendment, explaining the difference. Perfectly. Rich Herald, the Gentle Giant Last edited by CBRVFR; 09-25-2008 at 01:48 PM..

09-25-2008, 01:30 PM	#73
SheepOfBlue Your tax dollars at work Join Date: 12-18-2006 Location: Huntsville, AL Age: 46 Bike(s): CBR1000RR, RC51, VT500FT Posts: 6,867	Ah got you I was figuring a bond would be valued at face value not what you could sell if for today. The Buffet article was that I am VERY afraid this is a bail out with my money of rich folks that took to much risk. __________________ When the past is allowed to fade to nothing then only chaos is left.

09-25-2008, 10:03 PM	#76
SheepOfBlue Your tax dollars at work Join Date: 12-18-2006 Location: Huntsville, AL Age: 46 Bike(s): CBR1000RR, RC51, VT500FT Posts: 6,867	More folks making money: JPMorgan Chase buys WaMu assets after FDIC seizure: Financial News - Yahoo! Finance __________________ When the past is allowed to fade to nothing then only chaos is left.

09-26-2008, 04:46 AM	#77
oldfogey Senior member Join Date: 12-14-2006 Location: St Albans, UK Age: 56 Bike(s): Honda VFR800i, BSA Posts: 1,250	So a private equity group put $7bn in to WaMu in April and loses all of that in the "rescue"; most of the bondholders lose their money; more folks losing money. The $1.9bn goes to the FDIC for their guarantee to depositors, i.e. payment to taxpayers for providing the guarantee. "TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.'' JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. " __________________ Blessed are the young for they shall inherit the national debt - Herbert Hoover Last edited by oldfogey; 09-26-2008 at 05:21 AM..

09-26-2008, 10:47 AM	#79
CBRVFR Godspeed, #20 Join Date: 12-13-2006 Age: 56 Bike(s): VFR750 SV650 TZ250 Posts: 5,260	Which doesn't explain your prior post. __________________ "...the TV also never took away the screwdriver and shoved it up the repairman's ass." Our own Mr.2nd Amendment, explaining the difference. Perfectly. Rich Herald, the Gentle Giant