Assorted links

by on December 31, 2008 at 10:14 am in Web/Tech | Permalink

1 babar December 31, 2008 at 11:05 am

we retort, you deride.

2 Joshua Holmes December 31, 2008 at 12:27 pm

Right, because judges know so much more about economics and technology everywhere else. *snicker*

3 nelsonal December 31, 2008 at 12:56 pm

It’s not mark to market but collateral required on contracts regardless of their value. AIG had to post collateral because their own credit rating declined (and the deposits are exponential) even if the risks they underwrote were still quite good (or conversely quite bad). This part of the collateral calculation is independant of the value of the contract. Their models didn’t include that risk so when their credit rating declined they suddenly needed to post a huge amount of collateral (triggering more credit rating declines and additional collateral requirements…).

4 babar December 31, 2008 at 5:39 pm

> Their models didn’t include that risk so when their credit rating declined they suddenly needed to post a huge amount of collateral (triggering more credit rating declines and additional collateral requirements…).

1) There’s no real way to “model” this in any case. 2) That’s the mechanism in the AIG case, but:

it stands to reason that any highly leveraged entity is going to have huge trouble when its credit suffers, whether there are triggers mandated by contract or whether the market gangs up on you and shorts your stock or shorts/denies you credit. Leveraged entities are ultimately dependent on their ability to convince their creditors (or credit markets by proxy) of their ability to pay back what they owe. Once that is in doubt, and everyone knows it is in doubt, creditors will want get out quickly so as not to be the last one in line to get paid.

5 Capital Vandalism December 31, 2008 at 9:04 pm

I have an extensive post on AIG’s credit derivatives. http://capitalvandalism.blogspot.com/2008/12/aig-issues-press-release-no-headlines.html

The bottom line is that they had already marked down about 1/2 of them with modest cash losses. They then bought the CDO’s they insured at full price, and sold them to a SIV with mostly government money for 1/2 face value.

There will be no price discovery on this stuff, since it can’t be sold. But it will amortize and will either pay off at the 50% level or not.

It isn’t a mystery what happened, but it takes a fair amount of digging through the published financials.

A lot of people dont’ agree, or don’t like anything about the situation to the point that facts are irrelevant. They believe that when AIG/Treasury is talking they are lying and when they are quiet they are stealing.

The only thing about the SIV is that it provides finality on this for AIG. They are out the $30 billion but not the entire nominal value of the CDO’s.

They also have a much more simple problem which was with mortgage backed securities in their insurance entities. Once again, they did a SIV, took a big haircut, and were able to move on.

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