Citi and BOA gone with the wind?

[Moshe Goldberg Rubinshteyn]

[quote name='Chataya de Venoge' post='1728659' date='Mar 21 2009, 15.06']I agree with Isk and, to a lesser extent, Jaime L. or M. Whatever he's calling himself these days :)

I think it's absolutely appalling; TRULY appalling, that the media sh!tstorm tries to absolve borrowers of all blame. "Oh, you poor bay-bee, you didn't know what you were signing. It was confusing. The lender told you one thing, and the papers said another (not like you knew, because you didn't read those papers - oh, well)". As I have said many times before - anyone with a 6th grade education can understand those documents. Anyone with a 6th grade education should be able to understand "if I can only just make the payment at 5%, if these adjustable rates go up AT ALL, I'm in a world of hurt, better not do that."

It's quite frankly disgusting. It's one of the main reasons that I only read the New York Times (it does somewhat less of this) and the Financial Times (I'm a new subscriber!). I can no longer stand the crap that CNN and Faux News and all the other news outlets are shoveling about this.

AND the worst thing? [i]They want us, the responsible people, to PAY FOR IT[/i]! To "keep the 'homeowners' [ah, excuse me, "renters from the bank"] in their houses."

Fuckers. No word is too strong for them.

That's what I get pissed off at; not bonuses being paid by AIG that the government initially knew about anyways.[/quote]

And IP:

[quote]I think that borrowers who do not repay their obligations are at least as culpable as the lender. Banks made the loans very easily available, but that does not remove the responsibility from the borrower to repay the debt. That is the fundamental responsibility in debt. The secondary responsibility is for lenders to be careful who they lend to and how much.

Are we children that we can't manage our own finances? Should we take away all money and just have the govt give us our food and necessities? I absolutely can and do fault people who took out loans they could not afford. Anything else is to give in to the bullshit American culture of no-one taking responsibility for their own actions and choices, everything is someone else's fault and I should call my lawyer quickly to sue them.

There is a media myth that evil Wall St. pushed predatory loans on people who were incapable of understanding the debt. That probably did happen a bit (although CountryWide is not Wall St and people forgot that quickly) but it is a tiny slice of the mortgage market. Most of the mortgage problems are from people well able to understand their debt if they bothered, but who kept no safety-net against unemployment and some who even walk away from an affordable mortgage because it is under-water, not to mention all the flippers who were just in it for a quick buck.

Wall St enabled our greed and irresponsibility, they did not create it. If you think that Joe Public is blameless in this, then you have a very patronizing view of people as utterly brainless sheep (they are only occasionally partially brainless sheep).[/quote]


What you utterly fail to grasp is the following:

Sure, every borrower is responsible for his or her loan. You might lose your job, or get sick and have to pay medical bills, you might go through a costly divorce or whatever and you might find yourself unable to pay for the loan any more. That happens all the time, bull or bear market. I agree that the individual is responsible for their individual loans. I'm not fucking saying that people are fucking brainless sheep.

But what really pisses me off is when people like you (among others) claim the individual homeowners are responsible for the fucking collapse of the fucking American banking system.

No, they're not.

You just don't get it.

No single homeowner is responsible for that. Not even the homeless bum who got a $10m NINJA loan to buy a mansion, unless you want to argue that the default of a single such loan can bring shittybank to the verge of bankruptcy. So, shit like that from IP doesn't fly.

[quote]If you default on your mortgage, then you are one of the people creating the $1trn loss. That's how you caused Lehman and Bear Stearns to fail, and that's why your future tax dollars are being pledged to bail out the other banks before the financial system collapses and the economy goes into a spiral.[/quote]

Let me repeat. No single individual loan in default caused Lehman to go belly up.

The reason for the present crisis is the [u]systemic failure[/u] of the financial market, not the individual homeowners.

If you haven't grasped it by now, let's start from the other end:

Why do investors and shareholders agree to pay high ranking CEOs so high bonuses in the first place? The reason is not because they're so great, or smart, or because no one else is able to do their jobs or something. They're replaceable and there're greater and smarter people out there in the world (although they might not go into finance). The reason for their bonuses is, they're trusted with enormous amounts of money, and shareholders and investors need to buy their [u]integrity[/u] (I know, I know, that sounds like I'm talking in a different language). With integrity, I mean that these guys are supposed to make competent decisions in the best interest of [u]all of the shareholders/investors[/u], and not in their own interest or following only some special interest. In other words: you make the bonus high enough that these guys aren't tempted to cheat. Or phrased differently: if I, as an investor, want them to make decisions in their own interest or someone else's and not mine, why would I need to pay them so much in the first place?

The systemic failure of the financial market is that either those CEOs and the relevant decision makers down the line were either totally incompetent (which I don't think, but who knows) or corrupt (i.e. beholden to their own interest).

On the other end, individual homeowners don't have the birds-eye view of the market and they don't need to make decisions in the best interest of their banks' investors or shareholders. Why the fuck would they anyway? Sure as hell they're not getting hundreds of millions in bonus payments to look after the health of their financial company or to whomever their loan was sold.

No finger pointing, twisting and turning will be able to shift the blame for the crisis from the CEOs to the individual homeowners.

It is particularly worrisome that the financial types on this board don't seem to grasp this. If concepts such as integrity are so utterly lacking in that sphere, I think the point is made why we have the crisis at hand.

/rant

[ants]

[quote name='Iskaral Pust' post='1730237' date='Mar 24 2009, 02.15']I'm not a fan of this new proposal for a public-private partnership to buy toxic assets from banks. It offers investors a highly leveraged route to buy risky assets, with the govt acting as prime broker and insurer with very weak collateral (a small equity stake and the crappy debt itself).

As an investor, I'll be looking for any high yield funds that will be partaking of this. It seems like a great bet. From that perspective, this might be a very successful policy. However, it leverages the govt risk exposure far beyond what was intended in the TARP bill, and effectively circumvents the oversight of Congress. Perhaps the populist rage is forcing them to use under-the-table solutions, but it's not how I would like to see this play out.

[url="http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?hp"]Description from NYTimes[/url][/quote]
Totally agree.

I was all for the original Tarp plan, in that it took these assets at a discount to their original price, and the government got all the upside. Now, it appears Paulson completely screwed with the system to use it to help out his buddies, but I think the main idea was fine.

This seems to be saying that the government will pay through the nose to get private expertise, and to have them negotiate the price. Its as if Wall Street has said "hell no, we're not selling these to government at a discount if it kills us - but we will sell them to our buddies at the discount". Reeks of opportunism, weak will of the government, and nepotism.

[Altherion]

[quote name='Chataya de Venoge' post='1730971' date='Mar 24 2009, 02.36']People who were looking at the 50,000 foot view (Wall Street, CEOs, servicing companies) expected that the above-referenced borrower integrity was happening.[/quote]
I rather doubt it. Check out [url="http://money.cnn.com/2009/03/02/magazines/fortune/cohan_houseofcards.fortune/index.htm"]this excerpt[/url] of a book that discusses what went on at Bear Stearns (note that two of the leaders discussed are now charged with securities fraud). Or, for that matter, if you've followed this thread, you already know what AIG was doing -- outside of the business world (i.e. without all of the fancy acronyms and such), it would be called gambling with money that they didn't have.

I think I see Cobblestones' point now: what the borrowers who bit off more than they could chew did was wrong, but they couldn't have caused a collapse of this magnitude. In fact, what I got from my earlier discussion with Iskaral Pust is that not [i]that[/i] many of them have defaulted -- the banks' losses are magnified by the way the system was rigged (i.e. the several tranches of risk). The borrowers should have been more conservative in their estimates of their ability to pay for and/or resell their homes, but I think the lion's share of the blame lies with the people who built this ridiculous structure on top of the shady loans and the regulators and raters who allowed them to do it.

[ants]

Personally, I think too many people were involved with creating this huge hole to point fingers at any one group. Those doing so lose a lot of credibility in my mind. I mean, lets face it, a lot of factors had to go into this problem.

For example, if one of those leveraged 33:1 firms had gone under, they weren't too big too fail. Except that they all had issues at the same time. If that leverage had come back to bite one in the ass when the others were ok, they'd have gone down and been a lesson for the rest. Except when it did happen, everyone was holding on by their fingernails, and so the repercussions through the financial markets were too big to allow. So the government had to bail them out.

Or, if none of this had happened with the banks but one of the one-way bets AIG did went wrong (because it sounds like the mortgages were just one of a set), then AIG could have gone under. It would have had huge repercussions across the economy, but if the economy wasn't in the dog heap already it could have survived it.

Or if the ratings agencies had started to lower their ratings as more risky mortgages were written. Or if they'd downgraded AIG four years ago due to their one-way bets with the derivatives. Both would have caused short term pain, but not been a crisis.

Or if the banks hadn't reduced their capital and kept the old ways, but still written the rubbish they did, they probably could have coped with the defaults, maybe with a merger or two. Housing prices collapsing would have still been big issues, probably a recession, but it wouldn't have caused the current issues.

Or if the government had actually put some reasonable regulatory requirements through a few years ago. It would have stilled some growth, maybe flushed out some big issues and collapses. But the impacts would be less than the issues identified now.

There are so many components which were stuffed, but if they hadn't all been interlinked wouldn't have caused what we're now seeing. But we found out that there had been so many idiotic moves by so many players in so many areas, all at the same time, that when it came undone the entire thing just collapsed together. Forcing extraordinary moves to try and make sure that the entire thing wasn't armageddon.

Because do not make the mistake of thinking things couldn't be worse.
If multiple huge banks went under and tens of millions of americans couldn't withdraw money, and employers had to find another way to pay employees, and nobody could get credit, it would be a lot lot worse. Similarly if you add the consequences of the largest insurer going under, and suddenly nobody has insurance, you can't get more insurance because the remaining insurers don't have the capital to take that many policies on, that people are left exposed from life insurance, home insurance, car insurance, liability insurance, business insurance, warranty insurance, and a whole heap of other policies. Every company in a deal which requires a AAA insurance deal on something (e.g. with the leasing deals) would be stuffed. You think things ain't pretty now, well Australia went through that when HIH went under and that was when things were booming. AIG was bigger, and things ain't booming now.

[AndyP]

[url="http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html"]FT[/url]

[quote]China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.[/quote]
The Russians proposed something similar about a week ago.

[Iskaral Pust]

Cobblestones, we've discussed at great length in these threads the short-sighted greed of i-banks and AIG, and I know I've done a lot of typing to describe how they managed to get themselves into that mess. Nonetheless, as the country is on the brink of forming a lynch mob on Wall St., I think it's good to remember that there is a shared responsibility for what happened. The national perception and narrative of what just happened is undergoing some mighty spin. An unemployed person facing foreclosure wants to believe that it's all the fault of some fatcat on Wall St., they don't want to face up to their own greed and shortsightedness. If we collectively abdicate our share of responsibility for this, then we learn nothing.

A lot of the people getting foreclosed now probably lost money in the internet bubble too. Or on Enron stock. And that was someone else's fault too. I can't even guess at where they'll lose it next, but it's just around the corner. Do we do them any favors by pretending it was none of their fault? We can give them a scapegoat every time, but until they face facts and become more responsible they are doomed to stumble from one loss to another.

You're right that their was a systematic failure, but securitization of mortgages was only one component of that system. And that isn't even what destroyed the banks. They were brought low by a leveraged yield carry. They probably would have done that even if mortages weren't securitzed. The same thing happened in the late 1990's before the Russian default. Any period of low volatility and declining credit spreads seems to result in naive credit exposure and losses. Ask Long Term Capital Management.

[ants]

BTW, I've read the 33:1 quote a few places, but nobody has said whether that was before or after the "1" got cut an awful lot as the values of these mortgage backed assets fell. Does anybody know?

[Iskaral Pust]

[quote name='ants' post='1731070' date='Mar 23 2009, 23.21']BTW, I've read the 33:1 quote a few places, but nobody has said whether that was before or after the "1" got cut an awful lot as the values of these mortgage backed assets fell. Does anybody know?[/quote]

Financial disclosures for US i-banks at 12/31/2007 show balance sheet leverage of ~30x. At the same time, the European banks disclosed leverage of ~35-40x and US banks (not i-banks) disclosed leverage of ~15x. That was before any significant deteroriation of shareholder equity due to mortgage losses.

[ThinkerX]

I find myself wondering about Mr G's latest scam to get the economy moving again. Now, if my understanding is even vaguely correct, what happens is:

1) The toxic junk which nobody knows how to value properly (but almost never goes for more than 1/4th of the claimed value at past auctions) gets put on the auction block once again. Presumably there is a 'floor' to keep this trash from selling at the dismal levels like stuff has gone before.

2) Investors - presumably from the monied folk who still have money - step in and place bids on this junk - but, time comes to pay, they only have to pony over 10%??? of whatever the final price was, because we taxpayers are footing the rest of the bill. Not only that, said investors have the 10% or what ever they came up with guarenteed - no matter what happens, they at least get that money back.

So...say a typical slice of this garbage goes for $100 (as a sample or whatever its called). Ye private investor puts up ten bucks; Uncle Sam (meaning us tax payers puts up $90).

3) Ok...so maybe this stuff does start to make a bit of money over the next year or three. Say...a year after the auction that $100 sample is now valued at $110 (as an example, to keep the numbers simple). Say, also, that who ever is watching over the markets agrees this is a fair price. So...

4) Time to divvy up the profits. If my understanding is correct (probably not), ye private investor gets half the gain on the sample, or five bucks, making back half of what he sunk into this thing. Of course, Uncle Sam also gets five bucks...but we didn't fork over ten bucks for our cut of this mess; but 90 bucks. So... after a few years or what ever of this, the private investor is not only paid off, but ahead of the game...and we taxpayers are still trying to recoup our initial investment. And...

5) Say this mess tanks all over again a few years down the road. The private investor gets his original money back plus whatever he made in profits, and it is we tax payers who are giving him that money - so even if we did make some money in the interim, we get set back again, and this toxic lump stays there.

Now...if this is anywhere near right, the private investor cannot really loose - unless he does something really monumentally stupid - but the best the rest of us can hope for is that the pit really ain't as deep as it looks.

About sum it up? Iskaral?

[Watcher]

[quote name='Chataya de Venoge' post='1730971' date='Mar 23 2009, 18.36']Ratings agencies and all the others that ants mentioned also played a huge role. But at the end of the day, [u]NONE[/u] of this would have happened if Joe Blow and Becky Sixpack hadn't said, "sure, I can afford that...all I have to do is lie, not like they're checking, anyways. And rates will never go up - they've been this low for years. I can live in it a couple years and I can always refinance."[/quote]

This is where we disagree, I think that CDS and other structured back assists schemes were so out of control that a crash would've happened at sooner or later. Just like individuals can't live beyond their means forever, financial institutions couldn't have sustained the rates they were leveraged at. Sooner or later the system was going to break, if it wasn't the housing market it would've been something else.

[Watcher]

[quote name='ThinkerX' post='1731129' date='Mar 23 2009, 21.51']I find myself wondering about Mr G's latest scam to get the economy moving again. Now, if my understanding is even vaguely correct, what happens is:

1) The toxic junk which nobody knows how to value properly (but almost never goes for more than 1/4th of the claimed value at past auctions) gets put on the auction block once again. Presumably there is a 'floor' to keep this trash from selling at the dismal levels like stuff has gone before.

2) Investors - presumably from the monied folk who still have money - step in and place bids on this junk - but, time comes to pay, they only have to pony over 10%??? of whatever the final price was, because we taxpayers are footing the rest of the bill. Not only that, said investors have the 10% or what ever they came up with guarenteed - no matter what happens, they at least get that money back.

So...say a typical slice of this garbage goes for $100 (as a sample or whatever its called). Ye private investor puts up ten bucks; Uncle Sam (meaning us tax payers puts up $90).

3) Ok...so maybe this stuff does start to make a bit of money over the next year or three. Say...a year after the auction that $100 sample is now valued at $110 (as an example, to keep the numbers simple). Say, also, that who ever is watching over the markets agrees this is a fair price. So...

4) Time to divvy up the profits. If my understanding is correct (probably not), ye private investor gets half the gain on the sample, or five bucks, making back half of what he sunk into this thing. Of course, Uncle Sam also gets five bucks...but we didn't fork over ten bucks for our cut of this mess; but 90 bucks. So... after a few years or what ever of this, the private investor is not only paid off, but ahead of the game...and we taxpayers are still trying to recoup our initial investment. And...

5) Say this mess tanks all over again a few years down the road. The private investor gets his original money back plus whatever he made in profits, and it is we tax payers who are giving him that money - so even if we did make some money in the interim, we get set back again, and this toxic lump stays there.

Now...if this is anywhere near right, the private investor cannot really loose - unless he does something really monumentally stupid - but the best the rest of us can hope for is that the pit really ain't as deep as it looks.

About sum it up? Iskaral?[/quote]

Yep, I think anyone that claims the tax payer is going to come out of this crisis ahead is either an idiot or a lair. I also think if we don't pay now we are going to pay later in the form of even higher unemployment and inflation. The only trick is to find the least painful way.

[ants]

[quote name='Watcher' post='1731139' date='Mar 24 2009, 15.15']This is where we disagree, I think that CDS and other structured back assists schemes were so out of control that a crash would've happened at sooner or later. Just like individuals can't live beyond their means forever, financial institutions couldn't have sustained the rates they were leveraged at. Sooner or later the system was going to break, if it wasn't the housing market it would've been something else.[/quote]
Yes, but if the consumers hadn't created a housing bubble based on bad loans and tanked the system, just one of those companies going down wouldn't have been too big to fail, but a lesson to the others (or a wake up call to regulators). Would have been bad for that bank and possibly its counter-parties, but the system could have handled it. Instead, everything goes down, all the banks are fragile, and one failure causes the system to just about collapse, so we have to bail out the others.

As I said above, I don't think you can point a finger at any one group.

[lokisnow]

[quote]Yes, but if the consumers hadn't created a housing bubble based on bad loans and tanked the system,[/quote]But consumers didn't create the bubble, investors did. It was the pressure from the global investment pool of money for more real estate investments that created such enormous demand that the mortgage lenders and banks began to abandon all their standards for mortgage applications, creating the NINA loans etc. The investors put a ton of demand into the markets, the financial groups compromised themselves to try to meet that demand, and by compromising themselves they opened the floodgates in order to find people to fulfill the loans that the investors were demanding. The consumers who you claim created the housing bubble were part of the bubble but they were incapable of creating such a bubble because until recently they were barred from home ownership/the mortgage-debt class by the standards of the lenders.

consumers:housing bubble::rubber:balloon

[Fatuous]

Note: I'm still working out the theory and math on this stuff. From a straight comprehension standpoint, I had an easier time with quantum chemistry and relativistic physics. This was designed to obfuscate, that's all.

[quote name='ThinkerX' post='1731129' date='Mar 24 2009, 00.51']Now...if this is anywhere near right, the private investor cannot really loose - unless he does something really monumentally stupid - but the best the rest of us can hope for is that the pit really ain't as deep as it looks.

About sum it up?[/quote]

That was just about my assessment except I added the little fact of where these toxic debt is coming from, most likely the megabanks and insurance corporations. At best {my estimation at what would most likely happen}, taxpayers are merely redistributing the debt from the large to the small which may not be a bad thing in itself. At worst, everything falls.

As far as I can tell, no one wants to declare this debt worthless because then they have have to pay up on the CDSs valued at whatever they are. It's funny that those have given values while the CDO debt they are based upon does not. Regardless:

From Wiki:
"Credit default swaps are by far the most widely traded credit derivative product.[12] the Depository Trust & Clearing Corporation, which maintains a database holding around 90% of all credit derivative transactions, held $29.2 trillion of outstanding CDS trades as of 26 December 2008.

It is important to note that since default is a relatively rare occurrence (historically around 0.2% of investment grade companies will default in any one year[13]), in most CDS contracts the only payments are the spread payments from buyer to seller. Thus, although the above figures for outstanding notionals sound very large, the net cashflows will generally only be a small fraction of this total."

As far as I can tell, this "netting" process which devalues individual CDSs works as long as only one Investor has to pay up as they have made their own CDSs just in case such an event occurs; However, if they all have to pay up and collect, it would be economic chaos. Furthermore, if the US government nationalizes the banks to assume the bad debt, the CDSs would be...; I dont know and I don't think anybody wants to find out.

Would holders of CDSs leveraged against nationalized banks really petition the US Government for payment on them? If the banks just went bankrupt then what?

I have no idea how far off I am. Hopefully, I'm really, really wrong but it would explain why Obama and company are trying to keep the solution squarely in the private sector.

[The Progressive]

[quote name='ThinkerX' post='1731129' date='Mar 23 2009, 21.51']3) Ok...so maybe this stuff does start to make a bit of money over the next year or three. Say...a year after the auction that $100 sample is now valued at $110 (as an example, to keep the numbers simple). Say, also, that who ever is watching over the markets agrees this is a fair price. So...

4) Time to divvy up the profits. If my understanding is correct (probably not), ye private investor gets half the gain on the sample, or five bucks, making back half of what he sunk into this thing. Of course, Uncle Sam also gets five bucks...but we didn't fork over ten bucks for our cut of this mess; but 90 bucks. So... after a few years or what ever of this, the private investor is not only paid off, but ahead of the game...and we taxpayers are still trying to recoup our initial investment. And...

5) Say this mess tanks all over again a few years down the road. The private investor gets his original money back plus whatever he made in profits, and it is we tax payers who are giving him that money - so even if we did make some money in the interim, we get set back again, and this toxic lump stays there.[/quote]

Your understanding is slightly incorrect. If there's profit, it'll be split among Treasury and investors after paying back FDIC the loan at some interest. If the assets became toxic, whatever the investors put in will be lost as well.

In other news, I was encouraged today that Geithner asked Congress for more power to regulate non-banks financial entities like AIG, that Goldman Sach were scared shitless enough about Congressional compensation reform that they're signaling an interest to return all of the TARP money by April, and that Bernanke actually has more balls than Geithner when it was revealed that Bernanke wanted the Fed to sue AIG to prevent the bonus from being paid out.

Of course, it was a major letdown that the Senate has decided to table the vote on compensation reform til, yes you'd guessed it right, [b]late April[/b].

[Iskaral Pust]

A credit default swap is bond default insurance, for a given definition of default. The writer (AIG) agrees to insure any default losses, with details specified in the contract about what constitutes a default, and how the loss is determined, when it is paid out and who retains any ultimate recovery.

The buyer (Goldman Sachs) pays a periodic premium for this insurance. The period of insurance is usually five years, to provide the same duration (sensitivity to yields) as the underlying bond. Both parties can sell their positions to others at whatever price the market provides. The prices seen in the market for this trading give an implied market expectation of default risk on every insured bond. As the credit spread (underlying the price) moves, the collateral required of the writer changes - assuming any collateral is posted, which is where AIG was getting a free pass for years. Collateral is posted in a secure account (like escrow), but not actually exchanged in the course of normal market ups and downs.

Many of these contracts are not held for the full five years. They tend to be closed out after a year or two and then replaced with new five year contracts. The protection is less meaningful as the duration on the CDS shortens because it does not match the duration on the bond holdings.

The CDS writer (AIG) only pays out actual money if the insured bond defaults or if the contract is closed out at a time when the credit spread is wider than at the time of origination. As credit spreads widen, the buyer is making mark-to-market gains, but these are not realized into true cash until default or close-out. If the writer unwinds or closes-out the position when credit spreads are very high, like right now, then they have to pay out a lot of money. If they hold the CDS to maturity because they think current credit spreads over-state the risk of default, then they have mark-to-market losses now that will ultimately be reversed by mark-to-market gains if the underlying bond never defaults. And if they are wrong they might ultimately pay out even more money.

When Lehman went bust, the buyers of CDS on Lehman debt collected on their insurance with no problems. The sellers of insurance had posted collateral (only AIG was playing the AAA arbitrage) and all obligations were discharged. The market did hold it's breath for a few days to see if that would actually happen. It was the first major test of the CDS market.

Netting just means that actual cash flows are much, much less than notional exposure. Using a simple example, if I write a portfolio of CDS with $1trn in notional, with an insurance premium of .2% annually and 2% of the bonds insured actually default (with zero recovery for simplicity) over the five year period, then I would have received $2bn annually, or $10bn over five years, and I would have paid out $20bn. So I lost $10bn overall in five years because my insurance premium under-estimated the severity of defaults. Nothing close to $1trn ever changed hands.

[ants]

The way the scheme works as explained on Australian news was:

For a $100 security, both the government and private investor will put in $7 of equity. This will obviously be eaten off first if the security drops in value, so the investor does have some risk.
The remaining $84 wil be funded via a non-recourse loan from the government, so that the leverage will be 6:1. Obviously the interest on this gets paid back before any profit is paid.

Not [i]quite[/i] as bad as I thought, but still a bad bad plan in my view.

[The Progressive]

Of course, there's the nationalization option, but most Americans prefer corporate welfare instead.

[AndyP]

[quote name='Pax Thien Jolie-Pitt' post='1732410' date='Mar 24 2009, 22.09']Of course, there's the nationalization option, but most Americans prefer corporate welfare instead.[/quote]
Well some of us prefer neither, just not enough.

[CloudFlare]

As a side note, I've heard that many CDS contracts contain other triggering events as well. These would include things like big banks going out of business, or possibly stock prices going below a certain level for a certain amount of time. I had an article a while back that said AIG, BoA and C were on a lot of those contracts. The government is propping them up to keep the wolf at bay.

There were also many other details, like the I-banks using nonprofit organizations as the bagholders in case of a default.