This is making the rounds in the energy trading space today.
Nice article in institutional risk analytics.
The money quote right up front:
In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.
Ok, so, we have spent how much propping "a Ponzi scheme plain and simple"?
There is more below the fold:
My other favorite quote from the article:
The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.
What does that mean? There is a strong likelihood that, after examination by AG Cuomo, the whole CDS structure unravels. If that is the case, how the hell is the US treasury supposed to get the money back that flowed through AIG?
In reality, the article boils down the problem:
If AIG was a Ponzi scheme that is "too big to fail", what is the result. If you investigate and find the truth, then the answer is still the same - it's too big to fail.
If on the other hand, if you don't investigate - then the anger is existential, not proven by legal fact.
The one single fact that points to the current Treasury dpartment duplicity here is that we have never heard anything about the settlement period of these swaps. I think it is very likely that the "contract abrogation" issue is a red herring. Swaps ( a financial term indicating a contract for the difference between two values) always have a defined duration, just like your mortgage. But, unlike a mortgage, it is not defined by a pay back period. The "date certain" when the value is determined is set by the parties.
The longer the period, the greater the uncertainty for both sides. The article goes on to say:
Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
If that was the assumption, you write them for short time periods, just long enough to justify the cost. My personal belief is that the AIG CDSs are being paid off now because the money is due now. This money is being paid off to settle a debt - there isn't any more there there. There is no future recovery - this $2 Trillion is money out the door to pay the Ponzi investors - game over.
So, when we hear that we are saving the market - crap. We are paying off the suckers on the other side of the Ponzi scheme - people who were complicit in the whole game.