The outrage over American International Group Inc has been palpable here on DailyKos this past weekend, but I believe the rage is slightly misdirected. Yes the morons at AIG spent $100 million or so on bonuses. But $100 million is small change compared to the 100's of billions, possible trillions of dollars of taxpayer money at stake. The much more disturbing news to me this weekend was not AIG's bonus situation, but their revelations about what they have paid out on CDS and related contracts - ManfromMiddletown has a good diary on this this morning.
But the worst thing about it is that even after the US government started helping AIG back in September, they have continued to enter into new CDS contracts, putting billions more at risk! Why are they even allowed to continue this business? What possible purpose does it serve?
At least a part of the money "provided" by AIG to foreign and domestic banks has gone to "collateral postings", rather than actual payments on contracts. Moreover, the contracts listed there by Reuters were purchased after the date of the initial government rescue in September!
Why is AIG still selling these CDS contracts? What possible useful purpose can these unregulated contracts now serve, when provided from a company that is essentially bankrupt due to its previous over-selling of such contracts? Clearly the sales only make sense given the US government's "bailout" of AIG, and the assumption by the counterparties that AIG would continue to be sound - on the other hand, they still required the above-mentioned "collateral postings" to give some assurance of payment on the contracts so apparently they don't fully trust the US to continue the bailouts here.
We need CDS's and related contracts to be brought under complete and open regulatory control now. I realize government wheels take a while to turn, but this has to be a top priority. How would you force such regulation on them now?
Let me suggest one way. Why not introduce law to consider unregulated CDS's after a certain date to be a form of illicit gambling, governed by RICO or other relevant statutes? Parties and counterparties would have the option of converting an unregulated CDS to a regulated one through a registration process, preferably with a government-imposed fee equal to something like 1% of the total potential payout under the contract. Any unregulated CDS not converted would be considered null and void - no payout necessary, no further "insurance" payments needed by the counterparty.
This would have two salutory effects:
(1) Speculative CDS contracts would be greatly reduced through the imposition of the fee, and parties like AIG that have foolishly over-extended themselves in such promises would have a way out of their bad contracts
(2) The fee would raise a considerable amount of money for the government, to close that hole in the budget brought on by the bailout.
But I'm no expert here - can anybody tell me the adverse consequences of such a step?
I think it could be the only step that makes sense. We need to get these contracts regulated ASAP.