Word: cds
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...Last year AIG admitted that the company's Financial Products division entered into credit default swap agreements with banks that bought and securitized loans. CDS are a financial instrument that mimics the characteristics of an insurance contract. These instruments were most exposed to risk when the securitization market blew up following the housing market collapse. Not only is the company almost entirely owned by the government, but many of the executives receiving the bonuses are the same executives that marketed the CDS agreements that caused its downfall. (Read "Treasury Learned of AIG Bonuses Earlier Than Claimed...
...that - it's much thinner on the label side than it is on the other side. If you scratch the clear side, you can kind of polish it out. But if you scratch the label side, you're screwed. This is why jewel cases are designed to hold CDs in the air and stop [both sides] from touching...
...Goldman got bailed twice: first on its CDS exposure and a second time, to the tune of $4.8 billion, for another AIG fiasco, losses on its securities-lending business...
...Although a CDS is, in its simplest form, an insurance policy, AIG was selling something far more exotic. Say you buy a house and insure it. The insurer doesn't offer the same policy on your house to everyone else in the neighborhood; if it did and your house went up in flames, the insurer could get wiped out. In its CDS contracts, though, AIG wrote multiple insurance policies covering the same underlying package of increasingly toxic assets. In essence, it was underwriting systemic risk. This is the opposite of what insurance companies are supposed to do: diversify risk across...
...Between the CDS and securities-lending fiascoes, AIG still has lots of work to do. Gerry Pasciucco, the new head of AIG FP, is working to whittle down AIG's trading book by $1.1 trillion. Which raises the question, Does he really need those $165 million bonus babies to finish the job? AIG says yes, because they know the trades and the system, but not everyone agrees. "This is an engineering problem," says Rick Bookstaber, a risk expert and the author of A Demon of Our Own Design, which predicted the predicament we're in. "Right now there are probably...