Saturday, March 7, 2009

AIG's counterparties who were paid by the taxpayer billions and billions on their sham credit default swaps

* Goldman Sachs
* Deutsche Bank
* Merrill Lynch
* Société Générale
* Calyon
* Barclays
* Rabobank
* Danske
* Royal Bank of Scotland
* Banco Santander
* Morgan Stanley
* Wachovia
* Bank of America
* Lloyds Banking Group

That's where the taxpayer money went with the AIG bailout.

Once again, rich people, get bailed out by the working stiff.

And Bernanke treats this as a state secret! He says he's unhappy about it.

Just like Ken Lewis of Bank of America states that it will cause "irreparable harm" to the firm if BAC details who got the $3.6 billion of bonuses before Merrill Lynch imploded!

Irreparable harm? How about the damage to the average Joe's 401K? How about the evisceration of the equity value in the stock market?

What planet are these bankers living on? And why didn't these bankers take a haircut on their swaps with AIG?

Because they get paid first!

Remember, it was JP Morgan that created credit default swaps that let banks bet with another, without putting much money up. And now, this is the de-facto market that supposedly tells you the health of the companies.

These bankers can cause a run on the stock and incite panic and fear by buying credit default swaps at exorbitant spreads, and simultaneously buying cheap out of the money puts, so that other shareholders panic, and knock down the stock. The corporation then becomes hamstrung because it then cannot raise equity in the stock market to pay off it's debt, further increasing the vicious cycle of fear and increasing the pressure on the share price, and corresponding markdowns in their bonds.

And then, if these gangsters, are successful in their raid, and they force the company into bankruptcy, the credit default swap buyers are paid before anyone else!

Why would a credit default swap buyer exchange his debt? He usurps the traditional bond holder!

One of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely.

So now you have swap buyers, arbing their credit default swaps against bonds, with another bank backing their swaps, when they try and force these companies in bankruptcy.

After all, if you bought a credit default swap contract, your ultimate payoff is bankruptcy!

So you create a synthetic position, in a phantom bond that you don't own, that you get paid first, if you can drive the company out of business.

Thus the credit risk in the CDS market is only limited by how many contracts the dealers write. A corporation can have $1 billion of bonds, and $10 billion of swaps written against them!

It's like having 10 people that have fire insurance on your house. Everyone has an incentive to burn it down! And everyone then will get paid the full value of the house, even though only one person owns it.

It used to be that you would have to short the stock or the bonds to get paid. But everyone knows it always difficult to get a borrow for a corporate bond, and even shortselling now has a stigma attached to it.

Why bother? Leverage yourself to the gills in credit default swap land! Put a little down, and control billions! You have position limits on options, but not in swaps. And it's not reguulated! Isn't that special!

Remember when Lehman was imploding? John Paulsen bought credit default swaps on Lehman bonds for $22 million that he cashed out for over $1 billion dollars.

But Treasury and Bernanke don't feel fit to regulate this arena.

Why would they?

They just let you the taxpayer pay the tab!

And if our Fed was serious in cleaning up this arena, they should of given all the above institutions gigantic haircuts on all their credit default swaps.

That would of been the first step to regulation.

Impose some pain!

Now instead of AIG, all these other gamers trade with JPM and their "fortress" balance sheet. Why else is JPM making $5 billion in their derivative book?

They can now negotiate higher prices, and the counterparty can rest assured that if JPM would go down, Gentle Ben and Tiny Tim would be in their corner.

After all, JP Morgan's derivative book is only $88 trillion!

Who would want to regulate that???

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