Pyrrus is right. This article is about a “physical settlement” of a credit default swap. AIG sold protection via a CDS. The protection buyer used the CDS once the CDOs defaulted. Thus AIG bought the CDOs to settle a swap contract, and AIG may recoup some part of that over time with the CDO asset. Google it. AIG probably had little choice in the matter per swap contract.
As I understand it, the intent is to place the CDOs into a special purpose vehicle, off balance sheet (sound familiar?), to clean up the mess and allow AIG and the Fed to recover funds from the SPV over time (best read through rose-colored glasses).
Transferring the significant potential liabilities of one corporation (AIG..still AIG, just 80% owned by the gov) to “someone else” usually is good for the balance sheet. This is especially true when the AIG can’t keep the cash register closed long enough to refill the petty cash.
I think if you are under the belief that the taxpayer is “better off” when AIG improves their liquidity that is short term thinking…..the reason that “their” liquidity is being “improved” is because “we are giving it to them”. It’s still costing the taxpayer, either today or tomorrow.
While we’re at it, let’s buy all of that old crummy office furniture at aig NY. We can buy it for full price and then own it for 80 cents on the dollar tomorrow. Such a deal!
We, the taxpayers, are getting bent over one of those crappy desks at 70 Pine Street and taking up the rear without benefit of lube. And not just by AIG. Can any of the financial institutions that also benefited from our largess tell us where the first half of the money we gave them went, other than in mergers & acquistions? Our great-grandchildren will be paying for this mess long after we’re gone.
I don’t think this deal saved AIG any money. In your example using $100 I think they ended up paying the $100–just did it in two pieces one for $25 (buying the security) and aseparate on for $75 that they don’t talk about (and hope people miss).
If AIG didn’t kick in the other $75 there would have been no reason for the security holder to sell for $25 since AIG would have already had to post more than $25 in collateral. I could be wrong and maybe they made a small savings, but I don’t think it is anywhere near what you indicated.
CDO original value $100 insured by AIG.
Current value $25 because both the assets and AIG’s insurance are not worth very much.
In this scenario, AIG has a liability of $75 (original value less current value).
If they pay $25 for the CDO they can eliminate $75 from their liabilities.
So for $25 of cash they’ve cleaned up their liabilities by $75 for a net gain to its balance sheet of $50.
This is a good thing for AIG to do and saves the taxpayer money.
I’m not saying they made that rate of return. It was merely a simple math way of showing how they may have cleaned up their balance sheet. Pick any number you want – even $45 to clear $55 would work.
In my example, AIG would owe the $75 to themselves as they just bought the financial instrument – so yes they would be better off.
We have updated our privacy policy to be more clear and meet the new requirements of the GDPR. By continuing to use our site, you accept our revised Privacy Policy.
Pyrrus is right. This article is about a “physical settlement” of a credit default swap. AIG sold protection via a CDS. The protection buyer used the CDS once the CDOs defaulted. Thus AIG bought the CDOs to settle a swap contract, and AIG may recoup some part of that over time with the CDO asset. Google it. AIG probably had little choice in the matter per swap contract.
As I understand it, the intent is to place the CDOs into a special purpose vehicle, off balance sheet (sound familiar?), to clean up the mess and allow AIG and the Fed to recover funds from the SPV over time (best read through rose-colored glasses).
What you are saying makes sense, but that’s not what this article states vis-a-vis the underlying CDOs being in default.
Thanks for your source.
Transferring the significant potential liabilities of one corporation (AIG..still AIG, just 80% owned by the gov) to “someone else” usually is good for the balance sheet. This is especially true when the AIG can’t keep the cash register closed long enough to refill the petty cash.
I think if you are under the belief that the taxpayer is “better off” when AIG improves their liquidity that is short term thinking…..the reason that “their” liquidity is being “improved” is because “we are giving it to them”. It’s still costing the taxpayer, either today or tomorrow.
So, is anyone buying stock?
I don’t understand any of this crap anymore.
While we’re at it, let’s buy all of that old crummy office furniture at aig NY. We can buy it for full price and then own it for 80 cents on the dollar tomorrow. Such a deal!
We, the taxpayers, are getting bent over one of those crappy desks at 70 Pine Street and taking up the rear without benefit of lube. And not just by AIG. Can any of the financial institutions that also benefited from our largess tell us where the first half of the money we gave them went, other than in mergers & acquistions? Our great-grandchildren will be paying for this mess long after we’re gone.
That pretty much summed it up, to my understanding as well.
I don’t think this deal saved AIG any money. In your example using $100 I think they ended up paying the $100–just did it in two pieces one for $25 (buying the security) and aseparate on for $75 that they don’t talk about (and hope people miss).
If AIG didn’t kick in the other $75 there would have been no reason for the security holder to sell for $25 since AIG would have already had to post more than $25 in collateral. I could be wrong and maybe they made a small savings, but I don’t think it is anywhere near what you indicated.
CDO original value $100 insured by AIG.
Current value $25 because both the assets and AIG’s insurance are not worth very much.
In this scenario, AIG has a liability of $75 (original value less current value).
If they pay $25 for the CDO they can eliminate $75 from their liabilities.
So for $25 of cash they’ve cleaned up their liabilities by $75 for a net gain to its balance sheet of $50.
This is a good thing for AIG to do and saves the taxpayer money.
I’m not saying they made that rate of return. It was merely a simple math way of showing how they may have cleaned up their balance sheet. Pick any number you want – even $45 to clear $55 would work.
In my example, AIG would owe the $75 to themselves as they just bought the financial instrument – so yes they would be better off.