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Is AIG the main CDS insurer for Greek government debt?

Yves Smith and I received a tip at the weekend from a friend who reads the German press regularly about credit default swaps (CDS) on Greek government debt. Read Yves’ piece based on that article here. Below is mine.

Previously, I had mentioned the CDS exposure of the hapless German Landesbanks (banks owned by the individual German states or Länder – hence the term Landesbank). These same companies lost enormous amounts of money in the subprime meltdown – and apparently they have all sorts of other toxic exposure like Greek CDS still on the books.

So I find it interesting that the German daily Frankfurter Allgemeine is focussing instead on the AIG CDS connection to Greece.  Here’s part of what they had to say (my translation from German original):

London investment bankers named the American insurer AIG as an additional seller of CDS. It had to be nationalised during the financial crisis, because it had sold default insurance on U.S. mortgage bonds. The burden would have led to the collapse of the once largest insurer in the world. Before the financial crisis, AIG is said to have insured a large amount of sovereign credit risk. If there is still a major insurance positions on Greece, then the American government would have a strong interest in preventing a default of the country.

Even if it just concerns market rumours with the Greek banks and AIG, the examples illustrate the weakness of the CDS market. The protection is sold by banks or insurers, which themselves have only limited capital resources. As a general rule, they also have a much lower credit rating than the countries whose default they are insuring. The insurance provided by CDS may turn out to have been a bubble.

We await further details.  But, what should be clear here is that those banks and financial institutions that were caught out during the initial crisis period are probably the same ones now at risk yet again – except this time they start from a weaker capital position.

Source

Die Fieberkurve der griechischen Schuldenkrise – FAZ

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

14 Comments

  1. Anonymous says:

    > If there is still a major insurance positions
    > on Greece, then the American government would
    > have a strong interest in preventing a default of the
    > country.

    When this AIG story first hit, no one knew much about CDSs, or just why they were such a big deal. Then, it started to trickle out that there might be as much as $700T of these things “in play”, worldwide, against a world GDP of about $53T, leaving one to wonder how any of these things could ever be paid off if “things went south”?

    Some laid-off Investment Bankers let it be known that these CDSs often were tossed into cabinets, and “forgotten”, so it seemed very difficult to know how big a deal these things really were.

    Then it trickled out that people/organizations without any underlying financial interest in a given financial situation (like owning a given bond) were able to buy CDSs against the performance of that instrument, and we learned that many people got very rich being able to gamble in this market.

    So .. after all of this “trickling down” of information, it sort of became clear how this $700T number might be true—although I have never seen a list of all of these instruments and their notional values in a public setting.

    Obama claimed that “contracts are sacred” (or words to that effect) when he backed the AIG bailouts—but has never quite explained his position on the US taxpayer bailing out European gamblers to the tune of tens/hundreds of billions of dollars via CDS “contracts”. And now, we (the taxpayers) have to worry about losing money paying off CDSs that might well have been designed to fail by any number of Wall Street Investment Banks, and also possibly having to bailout, one way or another, Greece?

    It’s time to have a long, hard look at Credit Default Swaps—before they bankrupt the US.

    • 100% correct. Having been bailed out by the Obama Administration, Wall
      Street firms are already eyeing other victims (and for allowing these kinds of
      activities to continue, the US Treasury remains indirectly complicit,
      another good reason why one shouldn’t expect any action on Washington’s
      behalf). Since the economic collapse is causing all Euronations to run larger
      budget deficits and at the same time is raising CDS prices and interest rates,
      it is easy to pick off nation after nation. This will not stop with
      Greece, so it is in the interest of Euroland to stop the vampires now.

      In a message dated 2/21/2010 12:45:44 Mountain Standard Time,
      writes:

      ======

  2. Anonymous says:

    if AIG is involved, almost certainly the giant squid (Goldman Sachs) is too. And not just Greece. How about Spain, the UK even. Its almost inconceivable they are not involved.

  3. This crisis is a good opportunity to start the common issuance of EU debt and its financing at EU level. Read at
    http://mgiannini.blogspot.com/2010/02/too-and-too-many-pigs-to-bail-and-to.html