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1. When anyone loans money or buys an insurance policy, they are subject to counterparty risk: http://www.investopedia.com/terms/c/counterpartyrisk.asp http://w

by codexon 17y ago

1. When anyone loans money or buys an insurance policy, they are subject to counterparty risk: http://www.investopedia.com/terms/c/counterpartyrisk.asp http://www.investopedia.com/terms/c/counterpartyrisk.asp What is evil is that if it was you instead of Goldman Sachs, AIG would have paid you pennies on the dollar instead of the full value on paper. 4. See #1. Counterparty risk is part of every deal. Example: If you took a bet from Joe Sixpack that would probably pay $1000, but possibly $10 million (more than his life time earnings), the US government would not, and should not, be using taxpayer money to pay you $10 million in the worst case scenario. Unless you happen to be Goldman Sachs.

yummyfajitas 17y ago
The post I'm responding to is not criticizing the bailout, it is criticizing Goldman for enforcing it's contracts with AIG. For the record, I'm not defending the bailout, I've always opposed the bailout, and one of my highest rated comment on HN ever is a snarky post criticizing the bailout.
- codexon 17y ago
  it is criticizing Goldman for enforcing it's contracts with AIG It is nowhere near the financial norm to expect companies to have the government pick up the tab for failed counterparties. Why can't people criticize Goldman for doing that? Can I not criticize multi-billion dollar companies for putting former members into high ranking officers to influence the politics? Can I not criticize connected donors that break laws and then are able to get a pardon from the President? Just because they can, doesn't mean they should.
  - vlod 17y ago
    So what your saying is that the CEO who used to run the most successful bank on Wall St and probably knows more about financial markets than the majority of people shouldn't be used to run the FED? Who would you want to run the FED? An elected politician? :)
    - codexon 17y ago
      Actually yes, that is exactly what I am saying. And just so you know, the chairman of the Fed is Ben Bernanke, who has never been part of Goldman Sachs. The fact that Goldman is so successful is because Goldman members like Henry Paulson are unelected politicians, the worst type.
      - vlod 17y ago
        Maybe you have more faith in your elected politicians than I do! :) I however don't trust anyone who needs to lobby everyone all the time to raise enough money to get elected. Right.. my bad. Ben's great and seems to be great for the job.
        codexon 17y ago
        It's much worse when you let one person (even the president) do the picking.
- BearOfNH 17y ago
  The post I'm responding to is not criticizing the bailout, it is criticizing Goldman for enforcing it's contracts with AIG. I'm OK with Goldman "enforcing its contracts". The problem is that AIG didn't then declare bankruptcy, which would have resulted in AIG (OK, a bankruptcy judge) later paying Goldman a fraction of the contract values. Instead somehow, for reasons I don't see, the Fed poured tons of money into AIG which AIG then immediately used to pay Goldman 100 per cent of the contract values. After which AIG went belly-up, leaving the American taxpayer to foot the bill. Doesn't this seem a little smelly?
vlod 17y ago
Firstly these are not loans or insurance policies. Credit Default Swaps (as well as other financial instruments) are used to hedge your position. Maybe CDS do need regulation, but that's another discussion. To reduce this risk, trades are collaterized, (http://www.investopedia.com/terms/c/collateral.asp http://www.investopedia.com/terms/c/collateral.asp) and that's what GS called on AIG, and AIG couldn't pay any more and asked the government for help. e.g If you took a bet with Joe Sixpack for $10M and after the first day, the market moved in your favor say $1M, then based on the contract, Joe would have to give you $1M as collateral. If the following day it moved $2M in Joes favour you would have to give Joe $3M (his original $1M + $2M) All banks do this. This is nothing special that GS did. The monies involved are FAR greater than $10M so that really everything has to be collaterized.
- codexon 17y ago
  A credit default swap is insurance on a bundle of loans being defaulted on. Being collateralized doesn't change the facts. Goldman had the choice to exercise the option right away. It wasn't because they were forced to do so because the contract said so. They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can.
  - vlod 17y ago
    CDS are used as hedges. With insurance you have to suffer a loss. e.g I'm not allowed (AFAIK) to take out a life insurance on other people. I can take out a CDS that you will fail to pay your loans. If it was insurance it would be regulated. Maybe CDS are used so much like insurance and they do need to be regulated, but that's another discussion. Collaterized contract isn't an option. It's a daily swap of the market-to-market exposure. All banks do this to limit losses. "It wasn't because they were forced to do so because the contract said so." Sure, they didn't have to, but everyone does it daily. (Well the good/clever banks do). Your just upping your exposure if you don't and really, that's the whole point of getting daily collateral, so you don't. "They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can." Errh.. what's wrong with that? You think they should take a hit on their bottom line becz AIG didn't know what they were doing.

by codexon 17y ago

yummyfajitas 17y ago

The post I'm responding to is not criticizing the bailout, it is criticizing Goldman for enforcing it's contracts with AIG. For the record, I'm not defending the bailout, I've always opposed the bailout, and one of my highest rated comment on HN ever is a snarky post criticizing the bailout.

codexon 17y ago
it is criticizing Goldman for enforcing it's contracts with AIG It is nowhere near the financial norm to expect companies to have the government pick up the tab for failed counterparties. Why can't people criticize Goldman for doing that? Can I not criticize multi-billion dollar companies for putting former members into high ranking officers to influence the politics? Can I not criticize connected donors that break laws and then are able to get a pardon from the President? Just because they can, doesn't mean they should.
- vlod 17y ago
  So what your saying is that the CEO who used to run the most successful bank on Wall St and probably knows more about financial markets than the majority of people shouldn't be used to run the FED? Who would you want to run the FED? An elected politician? :)
  - codexon 17y ago
    Actually yes, that is exactly what I am saying. And just so you know, the chairman of the Fed is Ben Bernanke, who has never been part of Goldman Sachs. The fact that Goldman is so successful is because Goldman members like Henry Paulson are unelected politicians, the worst type.
    - vlod 17y ago
      Maybe you have more faith in your elected politicians than I do! :) I however don't trust anyone who needs to lobby everyone all the time to raise enough money to get elected. Right.. my bad. Ben's great and seems to be great for the job.
      - codexon 17y ago
        It's much worse when you let one person (even the president) do the picking.
BearOfNH 17y ago
The post I'm responding to is not criticizing the bailout, it is criticizing Goldman for enforcing it's contracts with AIG. I'm OK with Goldman "enforcing its contracts". The problem is that AIG didn't then declare bankruptcy, which would have resulted in AIG (OK, a bankruptcy judge) later paying Goldman a fraction of the contract values. Instead somehow, for reasons I don't see, the Fed poured tons of money into AIG which AIG then immediately used to pay Goldman 100 per cent of the contract values. After which AIG went belly-up, leaving the American taxpayer to foot the bill. Doesn't this seem a little smelly?

vlod 17y ago

Firstly these are not loans or insurance policies. Credit Default Swaps (as well as other financial instruments) are used to hedge your position. Maybe CDS do need regulation, but that's another discussion. To reduce this risk, trades are collaterized, (http://www.investopedia.com/terms/c/collateral.asp http://www.investopedia.com/terms/c/collateral.asp) and that's what GS called on AIG, and AIG couldn't pay any more and asked the government for help. e.g If you took a bet with Joe Sixpack for $10M and after the first day, the market moved in your favor say $1M, then based on the contract, Joe would have to give you $1M as collateral. If the following day it moved $2M in Joes favour you would have to give Joe $3M (his original $1M + $2M) All banks do this. This is nothing special that GS did. The monies involved are FAR greater than $10M so that really everything has to be collaterized.

codexon 17y ago
A credit default swap is insurance on a bundle of loans being defaulted on. Being collateralized doesn't change the facts. Goldman had the choice to exercise the option right away. It wasn't because they were forced to do so because the contract said so. They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can.
- vlod 17y ago
  CDS are used as hedges. With insurance you have to suffer a loss. e.g I'm not allowed (AFAIK) to take out a life insurance on other people. I can take out a CDS that you will fail to pay your loans. If it was insurance it would be regulated. Maybe CDS are used so much like insurance and they do need to be regulated, but that's another discussion. Collaterized contract isn't an option. It's a daily swap of the market-to-market exposure. All banks do this to limit losses. "It wasn't because they were forced to do so because the contract said so." Sure, they didn't have to, but everyone does it daily. (Well the good/clever banks do). Your just upping your exposure if you don't and really, that's the whole point of getting daily collateral, so you don't. "They knew AIG was going to be insolvent soon, so they wanted to get the money out of there as fast as they can." Errh.. what's wrong with that? You think they should take a hit on their bottom line becz AIG didn't know what they were doing.