Thursday, October 29, 2009

AIG CDS Collateral

We are starting to get some clearer coverage on the collateral calls that sunk AIG and, more importantly, made its CDS counterparties whole.  Unfortunately, that coverage is buried inches below the lead.  From today's Wall Street Journal:

"That [Maiden Lane] was a boon to the banks, which were effectively made whole. The banks pocketed $35 billion in collateral AIG already had paid them, and collected another $26.8 billion in cash for selling the investments at roughly their lowered values. Goldman Sachs got to keep billions in collateral and got paid $5.6 billion for the investments.

Whether that was the best strategy for AIG remains a subject of debate.

At the time, the move eliminated the risk that AIG would have to post still more collateral on the canceled swaps if the investments continued to decline. Last November, AIG's then-chief executive, Edward Liddy, told investors that the company was hemorrhaging cash because it had to post collateral on the swaps and problems with other deals. "We need to stop that and that's what this is designed to do," Mr. Liddy said.
The advantage of that approach was illustrated in the first quarter. Markets continued to fall but AIG didn't have to keep handing over more cash on closed-out deals. But AIG also surrendered any chance of getting some of the collateral back on the canceled swaps.

AIG's former longtime CEO, Maurice R. "Hank" Greenberg, argued publicly at the time that the government should have guaranteed the swap contracts, eliminating the need for AIG to post more collateral. Others have contended that AIG's trading partners should have been forced to accept less money for tearing up the contracts."

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