Comments on: Counterparties: Bailouts and money market funds A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: KenG_CA Sun, 24 Jun 2012 15:52:27 +0000 Danny, I don’t think even you can deny that Goldman made a collateral call to AIG that precipitated the takeover of AIG. The collateral call had to be triggered by either a decrease in the underlying assets that the swaps were covering, or a decrease in the value of the collateral posted by AIG (I don’t believe it was all cash and treasuries that AIG had put up, as you consistently claim). There were no realized losses at the time, which was the gist of this thread, that the government didn’t need to cover losses that had not materialized yet, they could have provided a guarantee that ultimately wouldn’t have been utilized.

So one way or another, the value of assets that AIG was either holding or insuring had been marked down. By somebody. Was it AIG? No. Tell me who wrote down the value of assets that enabled Goldman to demand more collateral be posted by AIG. And if you can’t answer it without resorting to insults usually sourced in high schools and drunk tanks, don’t bother.

By: MrRFox Sun, 24 Jun 2012 12:47:45 +0000 @DannyBlack – Good to see you back, Danny Boy. You were missed – much like The Roadrunner would miss Wily Coyote.

The conflicts of interest inherent in former GS people acting for government in any matter involving GS has been explained to you previously. Before you presume to pass judgment on others in such circumstances, perhaps you should be guided by this injunction –

“Judge Not Lest Ye Be Judged!”

By: Danny_Black Sun, 24 Jun 2012 09:35:24 +0000 Wow, it is like Groundhog day.

niveditas, from recollection, KenG_CA has had this explained to him at least 7 times. First couple of times, he can be ignorant. Another 4 times, maybe he gets away with it because he is clearly “special”. But frankly by now, we have to accept that he simply can’t accept the facts because they clearly violate his happy world-view that GS is the root of all evil and got some sort of special treatment from Paulson, despite the fact that whenever someone tries to give an example, it never quite stacks up and so they are left to give make vague noises about how “obvious” the conflicts are.

At the risk of getting lectured on structured products by someone doing equities in Dallas:

GS explanation of pricing: ocuments/WSJ-20100802-GSMBS

and here are all the non-existent trades that apparently never happened after Feb 2008: media/fcic-testimony/Derivatives/Goldman %20Sachs%20Follow%20Up%20Exhibit%20GS%20 MBS%200000039095.pdf

A diligent reporter could of course dig through this to check trades on tranches insured by AIGFP. From recollection of a 3rd hand story there was at least one post AIGFP takeover by gov that GS did with a European hedge fund.

By: KenG_CA Sat, 23 Jun 2012 12:09:29 +0000 niveditas, I was recalling a hypothetical analysis of Goldman’s involvement in AIG’s collateral problems written by someone else, although I do think there was validity to that premise. The chain of events that triggered the government’s takeover of AIG was a collateral call by Goldman, which demanded payment because they felt the value of collateral posted by AIG wasn’t enough to cover their potential losses. Whether it was the value of the collateral or the assets that were being insured, the value of both were not established by AIG, but by a third party. Who was that third party?

By: MrRFox Sat, 23 Jun 2012 03:44:24 +0000 @NiveD – Now that was a little over the line toward KenG, don’t ya’ think? The GS conflicts of interest with the (temporarily) former GS people who purported to be acting in the public interest was/is obvious. It taints with appropriate suspicion everything that was done. That’s why conflicts of interest are so insidious. Lighten-up, buddy.

IDK about your analysis of the econ of the matter. These were a crazy form of insurance that AIG wrote. Collateral had to be posted (and re-posted) even before there is any actual loss. AIUI, most of those insurance contracts never had to be paid on, at least not yet. IDK how many actual defaults on CDS-covered items happened – do you? Likely there were some out of Lehman and perhaps out of Greece, but how big was that?

For everything else, all the liabilities end when the term of the contract expires – “lapse” is the legal term for that. Any item not in default then is no longer a problem, right? So, how many were/are in actual default?

By: niveditas Sat, 23 Jun 2012 03:13:41 +0000 KenG_CA, no, the collateral was not marked down. As MrFox says, the “insured items” were marked down. Collateral is typically cash or treasuries. It would be insane for it to be “marked down”. You obviously have a bee in your bonnet about Goldman and are incapable of understanding the economics of the situation. I will not waste my time trying to explain it yet again.

By: niveditas Sat, 23 Jun 2012 03:07:46 +0000 MrFox, your proposed solution would have been much worse for taxpayers than what actually happened.

Let’s take some example numbers for illustration. Suppose AIG had written CDS on $100bn of assets, which the market was valuing at $60bn, and on which AIG had posted collateral of $35bn, but no longer had the cash to post remaining $5bn that counterparties were demanding. Let’s for the sake of argument also suppose that it has been decided that the government is going to bail them out.

Your solution says the government will promise to guarantee AIG’s collateral commitments. ie the government will post the $5bn and any more that may be demanded by lending AIG the cash required. There was another solution (which was actually implemented) that the government would simply buy the assets at “100c on the dollar”.

Let’s compare the two in a downside and an upside outcome.

Downside outcome: the assets turn out to be worth only 40c on the dollar. In your scenario, the taxpayer posts $25bn in additional collateral. AIG is insolvent, so the taxpayer loses almost all this money. What actually happened: the assets were purchased by the taxpayer for $60bn, and $5bn was loaned to AIG. Result, the taxpayer loses roughly $25bn.

Upside outcome: the assets turn out to be worth $80bn. In your scenario, the taxpayer is repaid the $5bn that was initially loaned. AIG shareholders get $20bn upside. What actually happened: the taxpayer gets repaid the $5bn that was initially loaned, and most of the $20bn upside. Result, the taxpayer gains most of the $20bn.

So, in your scenario, the taxpayer takes all the downside risk and gets none of the upside. In what actually happened, the risk/reward is more evenly balanced. Whatever your view on the value of the assets, what actually happened is obviously better for the taxpayer. If you believe AIG had a liquidity and not solvency problem, what actually happened is clearly better.

By: KenG_CA Fri, 22 Jun 2012 15:38:14 +0000 MrFox, I don’t think you’re all wet (at least not on this). I could never understand why the Fed or even the treasury didn’t offer to guarantee (for a fee to AIG) their collateral, as you suggest, that seemed like the least expensive and invasive solution. I could only surmise that the scholars (Geithner and Bernanke) got schooled by the sharks (Blankfein and Paulson). The latter two scared the former two into believing the world would collapse if they didn’t cover Goldman’s positions immediately.

I vaguely remember one of Felix’s regular readers writing a “fiction” comment about how AIG put up collateral for the swaps they sold to Goldman, and the market value of the collateral was then marked down to market by Goldman, which effectively forced AIG into technical default on their collateral agreement. It sounded more like reality to me, though.

By: MrRFox Fri, 22 Jun 2012 14:11:25 +0000 @SteveH – I have only a layman’s knowledge of AIGs CDS technicals. AIUI, the immediate crisis of solvency for AIG was a requirement that it post cash collateral with counterparties as credit quality of insured items deteriorated. Would have been no strain at all IMO to get out of that cash-crunch by replacing the cash-drop with a Fed guarantee. (Like any counterparty in the world was gonna say “No” to anything like that if the Fed asked for it?)

At the time, the equity position of AIG was taking hits from unrealized losses on the same items covered by those cash deposits, so both liquidity and equity appeared to be evaporating. But the positions AIG held have since recovered back most of what they gave up, haven’t they?

If I’m not missing something in this, it seems like a situation where a little out-of-the-box thinking might have got us on the path of this kind of approach to the entire rescue project, instead of the brute-force raid on the Treasury that was actually used. Am I all wet on this?

By: SteveHamlin Fri, 22 Jun 2012 13:53:28 +0000 @MRRFox: runs on MMMFs were almost entirely a liquidity problem; AIG was a massive solvency problem.

You can contain the former by loaning liquidity against unsecured assets (or credibly guaranteeing to do so).

You ‘contain’ the latter by injecting liquidity in exchange for equity (hopefully in the form of post-bankruptcy DIP after prior equity is wiped out and prior unsecured creditors take large cramdowns.)

How would a simple liquidity program have helped AIG? They became massively insolvent when they posted $100 billion in losses.