I appreciate your comments, but I think one can surmise by the below that taxpayers are bailing out both CDS’ holders who were hedging bond risk and also what I would call pure speculators. By the below reckoning, 44% of all CDS are held by speculators.

Factoid: By the end of 2007, the CDS market had a notional value of $45 trillion, but the corporate bond, municipal bond, and structured investment vehicles market totaled less than $25 trillion. Therefore, a minimum of $20 trillion were speculative “bets” on the possibility of a credit event of a specific credit asset not owned by either party to the CDS contract.

So this is the smoking gun.

Here is another interesting perspective, from Mish:

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Investment banks don’t have nice accounting like commercial banks do which segregate hedge instruments, held for sale, and held to maturity instruments. Rather, it’s by trading desk and Lord knows, each one had plenty of those, so you’ld really have to dig. You could find evidence that they held CDS for spec rather than as a hedge, but if asked, I’m sure Goldman could contrive an argument to show that at some point they had had the bond risk exposure even if they offloaded it. They can always claim they were unintentionally mismatched. You won’t find a smoking gun there.

I think hedging bond risk exposure is a legitimate use of CDS’. But buying CDS, perhaps with leverage, beyond bond risk exposure is reckless and what I would call speculation.

I think it is appropriate to step in to support holders of CDS purchased from undercapitalized (insolvent?)insurers. But I think it is criminal to use taxpayer dollars to support speculators who hold CDS positions that do not hedge bond risk exposure.

In the transfer of taxpayer dollars via AIG to Goldman Sachs, Merrill Lymch, Morgan Stanley and others, where is the evidence that these considerable funds were provided to parties who held AIG CDS’ for hedging bond risk exposure only?

And he claims he never knew!?!? That’s contrary to everything the IMF has said.

BR, here’s a little eye candy for those who are upset about this.

http://www.covingtoncorner.org/?p=195

I particularly like Bernanke’s “hood.”

Hedging bond risk exposure is the same thing as speculation that a company will go under. If I own a Ford bond but am concerned about Ford as a credit, I will buy protection in the form of a CDS. That doesn’t make me a speculator. However, if I am buying this insurance from a counterparty who is unregulated thus does not maintain any reserves, it does make me an idiot. My protection is worthless and should be valued as such, but the consequences of doing that would be to close Goldman Sachs amongst other institutions, and would be catastrophic. The CDS market, to my knowledge, is unwinding on its own as the Feds go through the Aegean stables of AIG’s books, via auctions which are settling contracts usually at pennies on the dollar. In the meantime, AIG is selling off whatever it can as it winds down too. Frankly, I’m not sure there’s any alternative.

As far as I can understand this, there are “legitimate reasons” for buying CDS’s, i.e., to hedge bond risk exposure, and then there is speculation, i.e. betting that the company will go under. The multitrillion dollard CDS monster is composed largely of speculative CDS positions as I understand it.

One can imagine that it is important to support CDS positions that are established to hedge bond risk. But why must taxpayers be on the hook to pay off speculative CDS positions? This smacks of immorality and fraud.

And as it seems that Geithner is supporting this looting of taxpayers to pay off speculators, what does that say about Obama?

Not sure it’s possible to explain anything these days, but the reason taxpayers got hit with losses on CDSs is that the Feds thought AIG was too big to fail. And they are.

Investment banks had no inside information other than watching the news with a vengeance. I’ve worked for one for a long time and their information isn’t any better than yours, except they know where to look.

Amd we don’t know what Geithner believes, other than that he was in favor of the initial TARP. I believe that was a big mistake, so you may be right after all.

Geithner believes taxpayers should pay off these bets, since AIG cannot, and we taxpayers are now on the hook for billions to pay off the Wall Street speculators thanks to Timmy. And Obama is nominating Geithner for Treasury Secretary. What is that all about?