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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

why regulation is a necessity.

October 14, 2008

i was going through a month old article on how AIG went under and came across this paragraph:

AIG was on one side of these trades only: They sold CDS. They never bought. Once bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have thought CDS were just an extension of the insurance business. But they're not. When you insure homes or cars or lives, you can expect steady, actuarially predictable trends. If you sell enough and price things right, you know that you'll always have more premiums coming in than payments going out. That's because there is low correlation between insurance triggering events. My death doesn't, generally, hasten your death. My house burning down doesn't increase the likelihood of your house burning down.

Not so with bonds. Once some bonds start defaulting, other bonds are more likely to default. The risk increases exponentially.

Credit default swaps written by AIG cover more than $440 billion in bonds 2. We learned this week that AIG has nowhere near enough money to cover all of those. Their customers-those banks and hedge funds buying CDSs-started getting nervous. So did government regulators. They started to wonder if AIG has enough money to pay out all the CDS claims it will likely owe.


What they did was the equivalent of writing naked puts on all the stocks that exist in the universe!!.(Even a lobotomized monkey with two weeks stock market experience would tell you writing naked puts on everyone and his uncle is the equivalent of playing russian roulette with 5 bullets in the chamber) and did they keep the money from the premiums to meet the inevitable defaults?..no they paid record bonuses and spent most of it!!! With such geniuses running the show, no wonder they nearly dragged down the world's financial system with them. Last heard they were treating themselves to some tax payer sponsored manicures after the fed bailed them out!!.

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posted by Bala, 8:27 PM

2 Comments:

The only good thing that the meltdown has done is to make you an active blogger again.
commented by Blogger Chenthil, 1:25 PM  
chen,
hee hee.. i just cant seem to stay away from ranting for entended periods
commented by Blogger Bala, 4:44 PM  

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