most I think were bought as insurance for a derivative,
No.
The figures I have seen indicate that up to 80% of the CDSs were held by parties with no property interest in the underlying security, i.e., bettors at a casino. This is why this 80% is not insurance. Explains why the total notional value of CDSs exceeds our GDP many times.
They are indeed financial WMDs.
One must have a property interest in the object of insurance before one can buy it. Otherwise, there is created a 'moral hazard,' i.e., a risk that the holder of the insurance/CDS will take steps to collect on the insurance by damaging or destroying its object. A good example of a moral hazard is allowing anyone to buy insurance on your house. The less ethical buyers of will be tempted to burn it down in order to collect a payoff on property whose existence is otherwise irrelevant to them.
This 80% of CDS held by parties with no interest in the underlying security is loaded with moral hazard. If insurance products, they would be declared illegal.
AIG is of course bankrupt. Look at its stock price. The investment banks which have survived have done very well collecting on CDS payoffs funded in part by you and me.
The AIG bonus money is an insignificant drop in the bucket. The public has been manipulated into looking at bonus payments while ignoring the huge taxpayer funded CDS payoffs. Even the comments here indicate that the manipulation has been slick and effective. Obama indeed knows how to manipulate public opinion. And, frankly, most people are clueless. In their defense, understanding what is going on is not easy. It takes work and most folks are unwilling or unequipped to study these issues.
No one has taken the bull by the horns and raised the lack of insurable interest in 80% of the CDS as a defense nor has any state insurance commissioner, who regulate insurance products, done anything to declare them the illegal issuance of insurance policies.
It is a scandal of immense proportions. Obama and Bernanke rail against AIG while paying off Goldman, Deutsche Bank, et al, for bets whose validity they have not bothered to challenge and which any insurance lawyer will tell you are not subject to collection. |
