The “Too Big To Fail Banks” are at it again, making huge speculative bets on the odds of sovereign default by Portugal, Italy, Ireland, Greece and Spain. The costly lessons of the derivatives debacle of 2008 have apparently been forgotten.
In 2008, the Too Big To Fail banks bought massive amounts of credit default swaps (CDS) to protect themselves from loss on their huge holdings of subprime mortgages. By purchasing CDS from institutions such as insurance giant AIG, the banks were able to convince regulators that their net exposure to losses on holdings of toxic mortgage instruments was minimal. So how did that work out?
As the mortgage market collapsed in 2008, AIG’s payoff liability on the CDS it wrote soared. AIG was forced to post additional collateral with counterparties as its credit rating was downgraded and the company faced collapse. If AIG had been allowed to collapse, the too big to fail banks who thought they were hedged, would have instead faced losses in the hundreds of billions. The failure of AIG would have resulted in huge losses to the banks and AIG bondholders.
Instead of being allowed to fail, AIG was bailed out by both the U.S. Treasury and the Federal Reserve who agreed to a financial commitment of up to $182 billion. The final amount lent or invested to bail out AIG by the Treasury and the Fed ultimately totaled $140 billion. AIG still owes the U.S. Treasury almost $50 billion according to propublica.org which tracks the cost of taxpayer financed bailouts.
It wasn’t until a year and a half later that the full truth about the AIG bailout was revealed. In January 2010, the NY Fed was forced to release documents showing that over $100 billion of the taxpayer bailout funds given to AIG were transferred to major financial institutions such as Goldman Sachs, Deutsche Bank and Merrill Lynch to make them whole on credit default swaps with AIG.
http://problembanklist.com/to-big-to-fa ... debt-0430/In 2008, the Too Big To Fail banks bought massive amounts of credit default swaps (CDS) to protect themselves from loss on their huge holdings of subprime mortgages. By purchasing CDS from institutions such as insurance giant AIG, the banks were able to convince regulators that their net exposure to losses on holdings of toxic mortgage instruments was minimal. So how did that work out?
As the mortgage market collapsed in 2008, AIG’s payoff liability on the CDS it wrote soared. AIG was forced to post additional collateral with counterparties as its credit rating was downgraded and the company faced collapse. If AIG had been allowed to collapse, the too big to fail banks who thought they were hedged, would have instead faced losses in the hundreds of billions. The failure of AIG would have resulted in huge losses to the banks and AIG bondholders.
Instead of being allowed to fail, AIG was bailed out by both the U.S. Treasury and the Federal Reserve who agreed to a financial commitment of up to $182 billion. The final amount lent or invested to bail out AIG by the Treasury and the Fed ultimately totaled $140 billion. AIG still owes the U.S. Treasury almost $50 billion according to propublica.org which tracks the cost of taxpayer financed bailouts.
It wasn’t until a year and a half later that the full truth about the AIG bailout was revealed. In January 2010, the NY Fed was forced to release documents showing that over $100 billion of the taxpayer bailout funds given to AIG were transferred to major financial institutions such as Goldman Sachs, Deutsche Bank and Merrill Lynch to make them whole on credit default swaps with AIG.