Glass-Stegall meant an insurance company couldn't know how risky a loan was because they weren't allowed to talk to the banking branch of the company.
As an insurance company they still needed the capital to cover the risk. Swaps had nothing to do with Glass-Stegall. That was a game the insurance co played and had nothing to do with the investment or savings side of the company. Please correct me, I'm still in a cloud. On Sat, Nov 7, 2009 at 12:53 AM, Gruss Gott <[email protected]> wrote: > >> Sam wrote: >> >> Alright, let's take this slow. >> >> AIG, the insurer, insured loans that AIG the bank made? > > No. > > AIG the insurer is regulated by insurance law which, among other > things, means they have to have a cash reserve in case a bunch of > claims are filed. > > This is important because, for example, if you think your house is > protected - but your insurer can't pay up so it's not - you'll lose > your house. If a bunch of people lose their houses when they thought > they were protected then it could impact the economy. > > All well and good regulation. A well regulated market. > > Now remove Glass-Stegall plus allow the new AIG insurer/bank/hedge > fund to sell any damn thing it wants regardless of risk without any > public disclosure. In other words you the home insurance customer has > no idea how safe your home insurance is and neither does anyone else. > > Uh oh. > > Now AIG the hedge fund decides to sell "swaps" - which is insurance > without the regulation. i.e. meaning no reserve necessary. > > AIG the hedge fund discovers that the more swaps they sell the more > monthly premiums they get. > > Thus if they sell infinite swaps they get infinite revenue. > > W00t! > > But there's a wee catch (which is frankly surprising given the > bonanza): the swaps require some collateral that's tied to AIG's > credit rating (which is determined by a company that AIG pays but > let's not get complicated). > > Well guess what? Remember that swaps require no disclosure so nobody > knows what AIG's exposure is (inculding them) so they have perfect > credit! > > double-W00t! > > Then the market tanks. ruh-ro! > > Now the swaps contracts start requiring payment since the underlying > securities that were being insured by AIG have gone worthless. > > Even the in-cahoots credit rater can't ignore the expose that AIG the > hedge fund has, so it asks them, "uh ... how many of these swaps did > you guys write?" Answer? "mmmm .... well. Uhhh ... it might be .... > hm." > > So the credit rater drops AIG's credit rating which triggers more > swaps collateral calls. Overnight AIG the hedge fund owes like $14 > billion. Major bummer. game over. > > Oh well, they took some bad risks and now the company - the WHOLE > COMPANY - goes bye-bye. > > But wait. What about you the term life insurance customer's policy? > Where's your money? gone. And that problem would've been so huge > that it alone would've taken the entire economy down. So the > government bailed AIG out. > > And Goldman Sachs was owed its own money from AIG swaps which they > would've lost but didn't because you bailed AIG out and some > government arsehole decided to use your money to pay off Goldman > rather than use that money for ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Want to reach the ColdFusion community with something they want? Let them know on the House of Fusion mailing lists Archive: http://www.houseoffusion.com/groups/cf-community/message.cfm/messageid:307260 Subscription: http://www.houseoffusion.com/groups/cf-community/subscribe.cfm Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=11502.10531.5
