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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: RockyBalboa who wrote (189286)3/9/2009 12:15:35 AM
From: pcyhuangRead Replies (1) of 306849
 
RockyBalboa:

>"Why was it possible that MBI, ABK and XL capital were able to tear up credit insurance contracts at a discount??

Why is AIG paying the full fare for the same ???"

To answer these questions, you have to first understand the differences in the CDS portfolios owned by MBI, ABK and XL (MAX) and that of AIG.

MAX had been writing only covered contracts, i.e., each written insurance contract is backed by a physical possession of the underlying bonds held by the banks. When the banks and MAX agreed to tear up the contracts, the banks had to submit the underlying bonds. If the bonds had any market value, then
the insurance contract is "torn up" at a discount (notional value less the market value).

AIG got itself into this mess because it had been writing naked contracts -- insurance ocntracts to the counterparties without anyone holding the underlying.

Cheers,
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