Posts filed under “Derivatives”

Did Goldman Sachs Kill AIG ?

I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.

First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.

Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”

Gee, how could that go bad?

Thus, looking at what was done, I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Brute(s) that thrust their daggers into Caesar.

Goldman became a counter-party of AIG by paying them $100 million to insure $23 billion of mortgage securities. The contract included several triggering events that required AIG to post more reserves. These included AIG’s loss of their Triple AAA ratings, as well as a drop in the value of the underlying securities. Both events occurred, forcing AIG to pony up billions.

The “dispute” between GS and AIG was over the timing and amount of the collateral call. I must emphasize that this was part of the contract between two very sophisticated financial firms — AIG was the world’s biggest insurer, and GS was one of the world’s biggest bankers.

As Cohan states “On July 27, 2007, Goldman sent a $1.81 billion collateral call to A.I.G. Financial Products.” But Cohan’s mention that: “Goldman — pretty much alone at that point — thought represented the decline in the value of the securities.”

But so what? That AIG gave GS the ability to demand increased collateral based on their own valuations is pretty astonishing — and dumb as hell. AIG ultimately negotiated down the $1.8B collateral call to “only” $450m; eventually, they ponied up an additional $1.55 billion in collateral. AIG also had to pay collateral to Merrill and Soc Gen.

So the question I ask: Is Goldman to blame for enforcing its legal rights against AIG?


How Goldman Killed A.I.G.
NYT Opinionator, February 16, 2011, 9:00 pm

AIG’s Financial Products Division (December 2008)

Revenge of the Black Swan (December 2008)

Why AIG Counter-Parties Recieved 100% on Derivatives (January 2010)

Solvent Insurer / Insolvent Insurer (March 2009)

Backdoor Bailouts for Goldman Sachs? (March 2009)

Myths of the AIG Collapse (September 2009)

Category: Bailouts, Credit, Derivatives, Really, really bad calls

Astroturfing: Study Falsely Claims Economist Affiliations

“This is the first I have heard about it. It’s not a very good report.” -Joseph E. Stiglitz, Nobel-winning economist > Dealbook: “A new study backed by pro-business groups takes a harsh stance on rules intended to bring transparency to the $600 billion derivatives market. The report, published on Monday, claims that proposed regulation could…Read More

Category: Derivatives, Regulation

Traders, Guns & Money

Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives by Satyajit Das>

Long before the 2008-09 credit crisis and collapse, one of the strongest warnings about the dangers of derivatives came from Satyajit Das.

I am about halfway thru, and I can tell you it reads more like a crime novel  than a financial book.


“Traders, Guns & Money is very fresh history, just two years old. Das picks apart the new machinery of the mega-trillion-dollar derivatives market, the one economists say might be next to collapse on our heads. And I’m with him, I really am. The guy has a thing for ridiculous puns and also for pitiable characters. We meet a couple of noodle makers who wreck their company on a deal no one but Das seems to understand. But by the end of his book, you’ll get the deal too, I promise.” – All Things Considered, NPR, October 15, 2008

“WHETHER you are an investor, an observer of financial markets, or even an investment professional, Satyajit Das’s Traders, Guns & Money should prove an entertaining, eye-opening read. –The Business Times, Singapore, September 27, 2008

“With the financial crisis tightening its chokehold on global banks, Das’ forewarnings – outlined in his 2006 book Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – are looking rather timely. Still, some in the industry initially scoffed at his warnings.” – The Toronto Star, September 23, 2008

“The sexier side of finance … at last … a convincing picture of what life is like in today’s modern financial industry. Traders Guns and Money by Satyajit Das not only has a catchy title, it actually manages to entertain, educate and inform.”  Corporate Financier, July 2006

“A must read for all CEOs, CFOs, Bankers and anyone who cares about what banks are doing with their money.” – Finance Asia, May 2006

“… true rarity: a derivatives book that keeps your attention all the way through. ” FOW April 2006

“… a scalpel of a book” – Financial Engineering News, July 2006

“A distincly timely book… This makes fascinating reading…. A good crib sheet for how the whole derivatives game works. ” – Financial Times, May 2006

“Das is especially good on structured products and on the recently fashionable world of structured credit… a diverting read” – Financial World, July 2006

“a worthwhile read for anyone with connection to the financial world” – World Finance, July 2006

“The murky and complex world of finances and derivatives is scrupulously and frantically told in this brilliant narrative. … This is a collection and recollection of exquisite financial tales well worth your time.’ Convergence, September 2006

“…a fascinating and compelling insight into the world of derivatives… [TGM has] a page turning quality more reminiscent of a John Grisham novel than a dissertation on derivatives.” – FINASIA, October 2006

“An absorbing accessible primer… scoots along at a blistering pace” – Wilmott Magazine, December 2006

“part thriller, part expose… will be useful for anyone with connection to finance…will tell you some of the truth of what really does go on.” Society of Business Economists Book Review – Jan 07


NPR Interview:

If the flash audio fails to load, go here


Chapter 2 after the jump

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Category: Books, Derivatives

Who Was Astroturfing Forged Letters Against FinReg?

Q: Why do Burger King Franchisees care about derivatives reform? A: huh ? > NPR discusses what a Bloomberg reporter found: Last summer, one still unnamed company hired a PR firm to launch a “grassroots letter writing campaign” on derivatives reform. The PR firm hired a contractor, who hired a subcontractor in Arkansas. And instead…Read More

Category: Bailouts, Derivatives, Legal, Regulation

So, How’d That Securitization Thing Work Out?

Discuss. UPDATING: In the deep, dark recesses of my mind, I knew this chart was the result of accounting changes.  But I more or less spaced when I was going through charts at FRED and decided this was discussion-worthy even though I really did know better.  I apologize to all for the brain fart;  I’ll…Read More

Category: Derivatives, Really, really bad calls

Secret Derivatives Trading

Courtesy of NYT > Louise Story has a front page article in the Sunday NYT that is your must read this morning: “On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan. The men share a common goal: to protect the interests of big banks…Read More

Category: Bailouts, Derivatives, Regulation

Yves Smith on Harry Shearer’s Le Show

Category: Derivatives, Legal, Video

Barron’s: Putbacks to Banks Could Be $134 Billion

During the housing boom, banks underwrote over $2 trillion in subprime, alt-A and option-adjustable rate mortgages underwriting could have losses as high as $700 billion, according to Amherst Securities research. The problem is, they weren’t particularly careful in how they performed their duties. Administrative and substantive errors, missing trust documents, misleading placement memorandums, all create…Read More

Category: Credit, Derivatives

Mortgage Origination, Assignment, and Securitization Process

I hate when I do this: I grabbed this killer chart from somewhere — it looks like a Fed research paper — then I promptly misplace the PDF. Anyway, here is a closer look at the entire loan to RMBS process: > Mortgage Origination, Assignment, and Securitization Process

Category: Credit, Derivatives, Digital Media, Real Estate

A Bailout Parable: Mad Meat

I met Eric Von Berg at an ING conference where I had just given a speech. Afterwards, he handed me a copy of this short book he wrote and illustrated: Mad Meat! How securitized lending collapsed the financial system which now exists on life-support. As the plane waited in the queue for takeoff in Atlanta,…Read More

Category: Bailouts, Derivatives, Humor