Mr. Whalen gave a good speech about five years too late to the American Enterprise Institute, an organization that is for economic chaos. AIG and Citigroup need even more bail outs because of their insane OTC and CDO businesses and the US is now taking over a number of life insurance companies. Our nation is rapidly being turned into an insurance organization, not a government!
What is To Be Done
With Credit Default Swaps?
Comments By Christopher Whalen
The American Enterprise Institute
February 23, 2009
One of the least understood but potentially among the more damaging factors contributing to the crisis in global financial markets is an asset class known as over-the-counter (“OTC”) derivatives and one OTC product in particular known as credit default swaps or “CDS.”*
Indeed, even were there not multiple financial market crises underway, reforming the CDS market would still be an urgent problem.
What is the problem with CDS? In my view, CDS and the entire OTC derivatives market represents a form of regulatory arbitrage –a retrograde and deliberate evasion of established prudential norms masquerading under the innocent guise of innovation. As in the case for the OTC market for unregistered securitizations, OTC derivatives are essentially designed to generate supernormal returns for a relatively small group of global banks which traffic in these officially sanctioned, but private gaming contracts.
‘Supernormal returns’ for a group of international bankers who happen to run many international political organizations or who belong to the Bilderberg group, etc: instead of being shepherds of the planet’s banking system, they were undisguised wolves eating the sheep and getting fatter and fatter, themselves.
As far as I can see, the reason is very simple. These over-the-counter derivatives grew at an astonishing pace from literally nothing but a gleam in a con man’s eye to a monster bigger than the entire banking system because they were magical! That is, invisible except when the magicians writing up these non-contractual contract decide they should become visible! How simple is that?
Since these things which were basically handshake deals between the Bilderberg gnomes, no one had to see if there was any real money involved. There was none, of course. These things were gambling devices, of course. Imagine going to a fancy casino and being allowed to place bets with impunity and never have to worry about actually handing over money? Of course, you will bet higher and higher amounts. The OTC market shot straight upwards.
It was rapidly moving towards infinity. The instant any system enters a growth cycle that is heading towards infinity is destroyed. If it is a star, it blows up. If it is a nuclear power plant, it will explode. If a currency has too many zeros and is printed faster and faster, it eventually uses up all the ink and trees on earth and vanishes into zero. This is why it is futile to keep trying to double anything, forever. You can’t do it.
The OTC fad didn’t last very long due to its inflationary potential very rapidly headed towards infinity. No one was regulating it nor was anyone trying to stop it. So it whacked into the wall of reality, all by itself, bankrupting the entire insurance and banking system.
Whalen is being polite. He calls the OTC business, a ‘gaming contract’ but it was a GAMBLING business every bit as honest as Las Vegas.
The established norms of which I speak, which were meant to ensure the stability and solidity of our financial markets, have been eviscerated over several decades by the Sell Side dealer community. These banks have bought their way through Washington, using the democratic process of money politics to subvert the Congress, academic researchers and the regulators into at least passive complicity into what could be described as a grand criminal enterprise. But more than mere money, I believe that the world of OTC derivatives and structured finance has brought the global system to its knees because of intellectual capture. But hold that thought.
The basic tension over CDS starts with the fact that these instruments actually increase overall systemic risk….
In a commentary that we published this morning in The Institutional Risk Analyst along with a copy of my comments and an interview with our friend Nouriel Roubini, Martin Mayer said to me: “Credit-default swaps were always a bad idea, because they rest on the false premise that statistical sampling from historical evidence can replace knowledge of the borrowers in the creation of bank loan portfolios. Among the lessons taught but not yet learned in the ongoing horror story at the banks is that the insurance of financial instruments is an activity that can be safely conducted only by governments.”
‘Grand criminal enterprise’ is correct! Thank you, Mr. Whalen. And this means, we must arrest a whole lot of corporate-jet-flying con men, eh? Hard to do this when they were allowed to ‘subvert Congress’ with campaign donations! I am very pleased that Whalen’s speech to the AEI has these harsh words!
Of course, the AEI is a far right wing group that always wants a free hand to ‘make money’ no matter how destructive. There are a lot of people out there who hate social obligations and lust for a dog-eat-dog world where the wolves get to eat the dogs. This fantasy world is where multibillionaires get to behave like street hoods in a slum, terrorizing everyone and stealing stuff because they have the power.
Right now, all the little old ladies of this world are being mugged by these clowns. And all babies are seeing their lollipops yanked by these street thugs in three piece suits. Our children’s future is being sold into debt slavery by these unsavory con men. The AEI wanted this world and look at it! A total disaster! Speaking of disasters, here is Whalen going after the AIG guys:
Then we have American International Group, which was the recipient of a vast public bailout last year financed by the Federal Reserve Bank of New York, apparently for the benefit of Goldman Sachs and AIG’s other CDs counterparties, come in large part from the writing of CDS contracts on complex structured assets that AIG did not understand. AIG’s sin was thinking it could buy low-risk growth through CDS, but even veteran CEO Hank Greenberg failed to understand the true risk of insuring high beta credit losses.
*The sad part is that in chasing growth by taking risks with CDS, Greenberg and AIG were entering a relatively low-margin business compared with the mid-double digit risk adjusted returns found in traditional, low-beta insurance. The trouble is that the real economy does not grow very fast compared to the open-ended growth of derivatives. And it is to create the illusory, notional “growth”via derivatives that is the real point of the OTC model. But that said, not all of the losses at AIG came from CDS and I suspect we shall hear more about that this week.
Likewise, the solvency and liquidity problems of some of the largest banks have been exacerbated by CDS, both due to exposures taken by the banks as a result of their underwriting activities in areas such as structured finance and related hedging by counterparties. In the case of C, the structured exposures include obligations which remain on the bank’s books from creating CDOs and “simulations” of these deals created with minimal cash collateral.
As in the case of AIG, there is a growing group of credit and risk analysts on Wall Street who believe that C’s structured exposures could be the largest source of loss to that organization through the credit cycle.
The greedy Greenbergs knew that an open-ended system would create total destruction. They didn’t care! This is hard to understand, now that we can see clearly how destructive these various ‘open-ended’ systems ended up opening: the gates to hell. As Whalen points out, the ‘real economy’ didn’t grow as fast as the faux economy. Obviously, no real thing can grow as fast as fake things.
If I have to count on my fingers and toes, then I will stop at 20. If, on the other hand, all I have to do is add zeros to 20, I can run up to quazillions and even higher in less than a minute! The more unreal something is, the quicker one can send it up to infinity. Even paper money has shape and form and creates volume! But hand-shake deals that are based on computer calculations, if both parties want it to grow as fast as possible, it doesn’t take very long to reach infinity.
AIG is in the news a lot now, just like ‘C’ in Whalen’s speech which is, I am assuming, that other irresponsible creature, Citigroup.
The revised agreement is expected to include an additional $30 billion equity commitment from the government, more lenient terms on an existing preferred investment, and a lower interest rate on an existing $60 billion government credit line, the source said.
AIG will also give the Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said.
AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.
This is funny! To extricate AIG from the OTC/CDO quicksand, the US government will now own the life insurance of millions of Asian people? HAHAHA. Let’s rename it ‘USA Lifeline’ or something along these lines! So, we are going to reduce US debts which are now going to be well over $12 trillion by next year, we will do this by being an insurance company?
Seriously, this is funny. Not only is the US taxpayers going to be insurance for all banks, not only does the US government insure over 80% of all home loans, we are now going into life insurance so we can capitalize our over-spending? HAHAHA. Wow! How about taking over the Girl Scout cookie sales, too? Maybe we can open international lemonade stands like this one:
Whenever it comes to things like paying an honest interest on savings, these guys are penny pinchers. When it comes to things that drain immense sums into their own pockets, they are happy to do Calvin-style business. We are paying $15 a glass for banker’s swill. Here is an old article from a decade ago, about the Greenberg clan:
The Greenberg Brothers: A Response from AIG
Your article on the Greenberg family ”Like father, like sons” (People, Mar. 1) is filled with inaccuracies that demonstrate lack of understanding of the insurance industry. The unfair characterization of both Evan and Jeffrey is offensive. In particular, the mean-spirited and personal nature of the comments about Evan Greenberg are a far cry from the responsible reporting one expects from BUSINESS WEEK. Nowhere is there a single quotation from an individual who had something positive to say about Evan Greenberg, AIG’s president and chief operating officer.
The subhead, ”The Greenbergs rule insurance,” is not merely hyperbole but absurd. The U.S. insurance industry consists of thousands of companies. No single company has more than a relatively small share of premiums written. Why, for example, when discussing Marsh & McLennan’s relationships with insurers including AIG, does the article not mention that there are other large brokers? The article gives the impression that AIG and Marsh & McLennan have some kind of holy alliance and that they completely dominate the industry. Anyone with any scant knowledge of the insurance industry knows this is simply not the case.
Editor’s note: Here is BUSINESS WEEK‘s reply to the factual errors cited:– The story didn’t say that the Greenberg family ”controls” AIG. The story states: ”Hank himself owns 2.45% of AIG’s shares outright–and the Greenberg clan indirectly controls much more through holdings in three private entities that hold a combined 22% of AIG.”
These con men are always happy to play hurt feelings! This is very true in the political arena. For example, I know a former candidate for Senator in a Southern state who was outraged when I wrote, she was a lawyer like Hillary Clinton. This Democrat went nuts and screamed at me on the phone, ‘How dare you compare me to her!!!’ Then turned around, this year, to boast that she had Hillary Clinton in her home!
I know there is a whole industry online, accusing the Greenbergs of all sorts of things that can’t be proven. The whole 9/11 business is like a big, black hole that prevents talking about many things but I don’t give a heck: just sticking to the mainstream stories, we can see that the Greenbergs are creeps and should be in prison. They are costing us many billions of bail out dollars and have nearly destroyed the entire world’s economic systems, more than enough grounds to charge them with grand larceny, treason, financial destruction of all sorts. Destroying everything is criminal, of course. And they should be severely punished.
And here is a recent story from September, 2008:
The Delaware case involved the relationship AIG had with an insurance firm that Greenberg heads, C.V. Starr & Co., which underwrote some of AIG’s business. The suit was filed as a shareholder action on behalf of AIG and was scheduled to go to trial on Monday. It accused the four men of improperly diverting more than $1 billion from AIG to C.V. Starr, where they also served as officers and received compensation.
Lee Wolosky, a lawyer for Mr. Greenberg, said the former CEO won’t make any settlement payments from his own pocket, meaning the settlement will be paid out by a D&O insurance policy. The “arrangements Mr. Greenberg presided over while at AIG were not only proper, but contributed to AIG’s growth into the largest and most successful insurance company in the world,” Wolosky said.
Stuart Grant, a lawyer for the plaintiffs, said in a statement: “This is a hugely important settlement for shareholders, one that not only returns some of C.V. Starr’s ill-gotten profits to AIG shareholders, but also advances critical corporate governance goals.” (AIG approved the settlement, notes the WSJ, but it doesn’t resolve other outstanding disputes between the company and Greenberg.)
In the New York case, which was brought by former AG Eliot Spitzer and stems from an accounting probe of AIG that led to Greenberg’s departure in 2005, state lawyers will ask Greenberg about his role at the head of AIG and his involvement in specific deals that led to the company’s earnings restatement in 2005, as well as adjustments AIG made to the financials of its subsidiaries.
Both Spitzer and Greenberg have been dethroned. Unfortunately, just as Whalen pointed out to the goofballs of the AEI, even though the entire business was turned into a financial Death Star by the Greenbergs and others, we can only go after technicalities due to them corrupting Washington, DC. The rules are for us taxpayers, not for these gnomes!
This is why the penalty for sucking on a joint is greater than joining in a conspiracy to undermine the world’s entire banking system.
European securities regulators issued guidelines on Friday on properly handling risk in the 6 trillion euro (5.35 trillion pounds) mutual funds sector as part of wider efforts to make markets safer for investors rattled by the financial crisis.
Investors are not rattled. They are POOR. Many discovered the investor groups, the many LLPs were actually poorly-supervised ponzi schemes! It turns out, Madoff made no trades on Wall Street for years and probably, Stanford also didn’t buy or sell anything at all and there are a huge number of cons who invested nothing and simply ate the money they were entrusted.
The risks are unacceptable. Immense amounts of savings were turned into digits and then shifted to shifty places, often unregulated, offshore pirate coves. Congress keeps talking about doing something about all of this but ends up doing nothing, they are too corrupt to vote to close down all the pirate coves scattered across the Seven Seas. Even if all the governments of the US and NATO band together to INSURE all investments, this is unacceptable.
Already, the entire planet reels from the collapse of the US debt defaults on houses! The US government is insuring everything so lending will be more reckless, not less reckless! This is why too much insurance is bad, not good. Because the worst outcome is always the possibility of bankrupting governments! This leads not to simple unhappiness because individuals can’t buy yachts and private jets. No, this leads to starvation, mass chaos, insurrections, revolutions and wars. Millions of people can die! This is why we have to let people lose money and not try using the government to bankroll risk!
Just six months ago, Warren Buffett was the wizard of Oz. He was perfect. He didn’t take losses! Well, now the truth is obvious: even Mr. Perfect isn’t exactly the great genius he thought he was. None of the wise guys are! Remember: these people all hang out together and are a collective force. They go to Davos. I don’t go there! They go to secret Bilderberg meetings! I don’t go there, either! They preen themselves on being informed, smart and astute.
But I didn’t see many of them running around, trying to stop the collapse of the US empire, the destruction of the gold standard, nothing! They all looked for ways to get rich out of all these things. A great example is pollution: instead of cleaning it up, they turned it into an exchange of pollution which is totally insane and stupid. And then selling and buying ‘pollution credits’ in the Derivatives markets!
This drained even more money from necessary things we need to keep society functional. And it let them get even richer while feeling pious. The actual cleaning has been dropping steadily. Instead, it simply shifted pollution to new sites and caused the US trade deficit to worsen.
This is ridiculous news! So, the rescue won’t work? OF COURSE NOT. One look at what Citigroup holds in the toxic OTC and CDO markets and their stupid derivatives swap business and it is obvious that Citigroup is a black hole, not a bank! And killing it off is the only working solution. This will kill off other banks but if we want to be entertained, we can have group trials in cities and then punish these guys, Chinese-style.
JP Morgan, Bank of America and Citigroup are the last three left of the insane OTC gamesters. $88 trillion, $39 trillion and $35 trillion are the top three and all three are basically bankrupt due to the immense OTC holdings which are $163 trillion in bad bets! This casino has to close and if it means putting all the players out onto the streets, then so be it.
We can’t save them! This should be obvious to everyone, even the politicians in DC.
Just as you cannot buy bad assets from an insolvent bank at “fair value” without worsening the insolvency, likewise when you mark down assets you are reducing the ability of the entire financial system to support leverage. When you combine the zero effective collateral and margin operating in the CDS market with the quarterly idiocy of marking down performing securities and loans to satisfy the advocates of FVA, it would be difficult to imagine the enemies of the United States constructing a more perfect weapon to bring about our collective demise.
That said, we are not against disclosing the short-term fair value of assets. In fact, we want to see expanded disclosure of swings in FVA for all public companies, financials and otherwise. And as we have written, the regulatory community is moving, painfully, slowly, to expand disclosure for banks and BHCs via efforts such as the expansion of the Shared National Credits reporting matrix, Basel II and a monthly reporting series on credit cards, a vast task that could require the collection of half a trillion records containing your personal credit and financial information, some 100 data elements per discreet record.
The whole system would work better if it was drastically pared down in size. This includes ridding us of the mega-banks. These things have been a total disaster for the entire planet. And certainly, their mania for creating credit has done immense harm to the world. They hope to create more credit in the future. But this is the last thing we need. We need a better system and the debate about all this should be louder! And everyone in the world should participate! Not just a bunch of glad-handing Bilderberg clones or Davos wheeler-dealers.
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