AIG Non-Story of the Day, Hedge Fund Edition

March 17, 2009

Serena Ng has the non-story of the day, but given the general brouhaha surrounding AIG, you can be sure that all manner of noise will surround it. AIG was a net seller of credit protection on mortgages; it lost a lot of money. Credit default swaps are a zero-sum game, so that means the net buyers of credit protection on mortgages made a lot of money. Among those buyers of credit protection were hedge fund mangers like Steve Eisman, who was famously profiled by Michael Lewis.

Follow the string far enough, then, and you can quite easily manage to justify a headline like "Hedge Funds May Get AIG Cash". But the crazy thing is that the hedge funds didn’t even buy their protection off AIG. They bought it from a special-purpose vehicle as part of a deal to create synthetic CDOs; AIG was then brought in to insure the most senior parts of the structure. The connections here are tenuous, and boring. But of course that won’t stop the pro-forma expressions of outrage.

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