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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 n

by 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.
  - codexon 17y ago
    Collaterized contract isn't an option. It's a daily swap of the market-to-market exposure. update You are wrong. Goldman did not demand collateral from AIG because they had a AAA rating. http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=opinion http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=o... What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.
    - vlod 17y ago
      Yeah okay.. sure, maybe they didn't HAVE to and so decided to increase their exposure becz AIG was AAA, but that doesn't mean that line is going to go on forever. I think after $13B (I presume its around that figure as they got that money back from the government) of exposure GS decided to call them on it. Maybe AIG should have not sold $13B of CDS that they couldn't collateralize. I don't see how that's GS problem.
      - codexon 17y ago
        Uh...your whole argument was that GS was doing daily collateralized transactions and were going about their business as usual. I just proved this was wrong. If GS withdraws all the money in one go, this was not a day to day transaction. And the whole point of my original comment was to point out that it IS Goldman's problem. It should NOT be the US taxpayer's problem. But it is thanks to Goldman Sach's influence on the government.
        vlod 17y ago
        Looking back at the original article it suggests that GS was making collateral calls regularly: "Goldman checked the market prices daily and made numerous collateral calls on AIG beginning in mid-2007. By September 2008, Goldman had $7.5 billion of AIG's money and claimed it was owed an additional $2.5 billion" This suggests that it wasn't all in one go, but over a year. This is from Goldman. Not sure what the source of the NYTimes article is. "It should NOT be the US taxpayer's problem" The government decided that AIG was too big too fail and it would back AIG obligations 100% to prevent a meltdown in the economy. Why should GS then write-off money owed to it by AIG (based on a contract)?

by vlod 17y ago

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.
- codexon 17y ago
  Collaterized contract isn't an option. It's a daily swap of the market-to-market exposure. update You are wrong. Goldman did not demand collateral from AIG because they had a AAA rating. http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=opinion http://www.nytimes.com/2010/04/04/opinion/04burry.html?ref=o... What’s more, I demanded daily collateral settlement — if positions moved in our favor, I wanted cash posted to our account the next day. This was something I knew that Goldman Sachs and other derivatives dealers did not demand of AAA-rated A.I.G.
  - vlod 17y ago
    Yeah okay.. sure, maybe they didn't HAVE to and so decided to increase their exposure becz AIG was AAA, but that doesn't mean that line is going to go on forever. I think after $13B (I presume its around that figure as they got that money back from the government) of exposure GS decided to call them on it. Maybe AIG should have not sold $13B of CDS that they couldn't collateralize. I don't see how that's GS problem.
    - codexon 17y ago
      Uh...your whole argument was that GS was doing daily collateralized transactions and were going about their business as usual. I just proved this was wrong. If GS withdraws all the money in one go, this was not a day to day transaction. And the whole point of my original comment was to point out that it IS Goldman's problem. It should NOT be the US taxpayer's problem. But it is thanks to Goldman Sach's influence on the government.
      - vlod 17y ago
        Looking back at the original article it suggests that GS was making collateral calls regularly: "Goldman checked the market prices daily and made numerous collateral calls on AIG beginning in mid-2007. By September 2008, Goldman had $7.5 billion of AIG's money and claimed it was owed an additional $2.5 billion" This suggests that it wasn't all in one go, but over a year. This is from Goldman. Not sure what the source of the NYTimes article is. "It should NOT be the US taxpayer's problem" The government decided that AIG was too big too fail and it would back AIG obligations 100% to prevent a meltdown in the economy. Why should GS then write-off money owed to it by AIG (based on a contract)?