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#61 |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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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.
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Blessed are the young for they shall inherit the national debt - Herbert Hoover |
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#62 | |
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I'll never tell a lie.......SUCKER!!
Join Date: 12-18-2006
Location: Milwaukee, WI
Age: 27
Bike(s): 1996 900RR (sold)
Posts: 584
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Basically, as my coworker put it, these companies were playing blackjack, doubled down, and lost.
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http://www.gighive.com/the-buzz/ "My friend said to me, ‘You know what I like? Mashed potatoes.’ I was like, ‘Dude, you have to give me time to guess. If you're going to quiz me you have to insert a pause." |
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#63 | |
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Godspeed, #20
![]() Join Date: 12-13-2006
Age: 56
Bike(s): VFR750 SV650 TZ250
Posts: 5,260
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OK, thanks - just read a NYT business section article about the things -
Apparently they started doing this in the late '90s... Quote:
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.
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"...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 11:08 AM.. |
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#64 | |
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Your tax dollars at work
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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?
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When the past is allowed to fade to nothing then only chaos is left. |
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#65 | |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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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.
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Blessed are the young for they shall inherit the national debt - Herbert Hoover |
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#66 | |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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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.
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Blessed are the young for they shall inherit the national debt - Herbert Hoover |
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#67 | |
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Your tax dollars at work
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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.
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When the past is allowed to fade to nothing then only chaos is left. |
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#69 | |
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I'll never tell a lie.......SUCKER!!
Join Date: 12-18-2006
Location: Milwaukee, WI
Age: 27
Bike(s): 1996 900RR (sold)
Posts: 584
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Quote:
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http://www.gighive.com/the-buzz/ "My friend said to me, ‘You know what I like? Mashed potatoes.’ I was like, ‘Dude, you have to give me time to guess. If you're going to quiz me you have to insert a pause." |
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#70 |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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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.
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Blessed are the young for they shall inherit the national debt - Herbert Hoover |
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#71 |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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That's capitalism for you.
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Blessed are the young for they shall inherit the national debt - Herbert Hoover |
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#72 |
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Godspeed, #20
![]() Join Date: 12-13-2006
Age: 56
Bike(s): VFR750 SV650 TZ250
Posts: 5,260
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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.
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"...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.. |
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#73 |
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Your tax dollars at work
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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.
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When the past is allowed to fade to nothing then only chaos is left. |
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#74 |
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"Si vis pacem parabellum"
Join Date: 12-18-2006
Location: Ft. Worth
Age: 40
Bike(s): '05CBR1000RR. '07SXV5.5
Posts: 2,658
Images: 99
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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.
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#75 | |
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is feelin alright
![]() Join Date: 12-13-2006
Location: Rocket City
Age: 34
Bike(s): 1KRR; VFR; FMX650
Posts: 5,741
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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.
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Ducit Amor Patriae Richard Herald, The Gentle Giant The nation that makes a great distinction between its scholars and its warriors will have its thinking done by cowards and its fighting done by fools. --- Thucydides |
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#76 |
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Your tax dollars at work
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More folks making money: JPMorgan Chase buys WaMu assets after FDIC seizure: Financial News - Yahoo! Finance
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When the past is allowed to fade to nothing then only chaos is left. |
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#77 |
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Senior member
![]() Join Date: 12-14-2006
Location: St Albans, UK
Age: 56
Bike(s): Honda VFR800i, BSA
Posts: 1,250
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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. "
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Blessed are the young for they shall inherit the national debt - Herbert Hoover Last edited by oldfogey; 09-26-2008 at 05:21 AM.. |
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#78 | |
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Your tax dollars at work
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When the past is allowed to fade to nothing then only chaos is left. |
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#79 |
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Godspeed, #20
![]() Join Date: 12-13-2006
Age: 56
Bike(s): VFR750 SV650 TZ250
Posts: 5,260
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Which doesn't explain your prior post.
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"...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 |
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#80 | |
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I'm BATMAN!!!
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Unrealistic, but it sounds nice.
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"This is your life - are you who you want to be?" Learn all you need to know about Mac OS X "Chuck Norris can slam a revolving door" |
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#81 |
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CAN CRUSHER
Join Date: 12-13-2006
Location: Central Illinois
Age: 40
Bike(s): worm gear
Posts: 1,732
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#82 |
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Join Date: 01-03-2007
Location: Las Vegas
Age: 39
Bike(s): ZX-10R & HD Ultra Classic
Posts: 995
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The REAL reason socialism doesn't work in the long run... they suck at math.
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