This debacle was engineered long before Bush/Cheney rode off with their loot, leaving Obama with a $2 trillion deficit time bomb and no good choices.

I’ve asked many times: What are the total derivative risk liabilities assumed in the 80% purchase of AIG? CDS insurance contracts on real assets like a CDO or MBS can’t be more than the face value of the asset. However when you take a $100 million portfolio of loans and bet it 20 to 1 in the derivative market, the risk becomes a $2 billion supernova. So, what’s the damage? Only a trillion? A few trillion? Tens of trillions?

Unlike Lehman, AIG was “taken over” to keep it out of bankruptcy court where its assets and liabilities would have been disclosed under penalty of perjury, especially their non-regulated divisions like AIGFP.

Essentially, U.S. taxpayers put up $170 billion to make sure that AIG wouldn’t end up in court like Enron. But that won’t make the liabilities go away. Hence trillions in Fed & treasury injections since at least mid-2007 that have done nothing to expand lending in the Main Street economy.

This is a fight to the death between derivative speculation and the real economy with our government still holding the scale down for the wrong side.

It’s like our next vacation plans:

“We’re making a trip of a lifetime to the sun just as it goes supernova, you don’t want to miss it ….

You can’t do that; you’ll be burned up!

Nope, we’ve got that covered — we’ll go at night.”

http://idea.sec.gov/Archives/e…..4e10vk.htm

On page 263, it shows that AIGFP as of December 31, 2008 had $1.515 trillion in derivatives with $305 billion in CDSs outstanding. 2/3 of them were for 2 or more years. 57% were in the 2-5 year range.

Of the ~$305 billion in CDSs as you point out $234 billion is in the form of regulatory relief CDSs written primarily for European banks. These allowed the banks to make more and riskier investments. They could dip more deeply into their reserves than the regulations normally allowed and AIG guarnateed to make up whatever they needed to bring their reserves to what they needed to be according to the European regulators.

Given all the losses that European banks have experienced I would think that there could be significant losses in these.

About those potential losses it has this to say on page 268:

Given the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and the payment that may be triggered in connection with any such exercise, AIG is unable to reasonably estimate the aggregate amount that it would be required to pay under the super senior credit default swaps in the event of any credit rating downgrade below AIG’s current ratings.

Due to long-term maturities of the CDS in the arbitrage portfolio, AIG is unable to make reasonable estimates of the periods during which any payments would be made. However, the net notional amount represents the maximum exposure to loss on the super senior credit default swap portfolio.

It says much the same about collateral calls, i.e. it doesn’t know.

As for the rest of it, $883 billion are in interest rate swaps. There are also $194 billion in currency swaps and $132 billion in various options. But the 10-K says that AIG has both sides of all these, so it’s covered.

So very short version. AIG has $305 billion in CDSs. 2/3 of these are for 2 or more years and 3/4 of them at least could experience real losses.

Thanks to everyone for pointing out the 10-K to me and masaccio for going so far as giving me the page numbers. I am flummoxed I guess that Liddy couldn’t get someone at a company the size of AIG to come up with a 2 minute presentation on this. 5 minutes if he described the AIGFP operation and who the counterparties were. Aside from being buried in a big report, this stuff isn’t that hard to grasp.

The Wall Street Journal’s Web site is already (secretly) free

Perhaps there is some sort of problem if masaccio points this out, but in most cases, if I can get the correct title of the WSJ article I want to view, all I need to do is to put that title into Google, and I can get the full article.

The full title to masaccio’s piece is: Hedge Funds May Get AIG Cash, which you can get by following the link he gives. Copy, open Google, paste. There’s a great visual that goes along with the article linked at the sidebar.

These “financial products” are all hooey and need to be made illegal. It may not be illegal (though it should be) but how can these managers expose their companies (and now the tax payes) to such enormous downside risk? It’s like a hamburger flipper at MacDonalds signing a note to buy a yacht. That’s insane. But these guys are paid millions to do just that.

I’d like a CDO with mustard and catsup; an order of naked CDSs on the side; hold the million dollar bonus pickle.

Q: Has there actually been a time when people used these modern financial products to make big money?