While perusing today’s Times, I came across this article (Investors Turn Gaze to A.I.G.), in which we hear the first rumblings about what will no doubt be the next Lehman Brothers: American International Group. This is yet another financial services company that is hemorrhaging money, partly because it was systematically looted by its management, who have now been forced to disgorge a part of their ill gotten gains, but mostly because it was betting heavily against the inevitable: the day when the bill would come due and the defaults would start coming in a market riddled with debt that would never be repaid:
Red ink has been flowing at A.I.G. It reported a loss of $5.3 billion for the second quarter, after a $7.8 billion loss in the previous quarter. The main problem is sophisticated contracts, called credit default swaps, that A.I.G.’s financial products unit sold to investors.
The contracts allow buyers to bet on the creditworthiness of debt obligations backed by mortgages. As home values have fallen, the values of those underlying mortgages have declined. A.I.G. has had to reduce the value of the swaps on its books.
I wrote about credit default swaps in February ( Another economic mess coming). There are (or were at the time I first wrote about them) $45 Trillion dollars worth (well, maybe not worth, but you know what I mean) of these things on the market, an amount that exceeds the value of all the stock on the stock market, which means it exceeds, pretty much, the value of everything. As defaults increase, the calls on the sellers of these instruments will increase. They in turn will go belly up, but not before the people who grew fat selling these investments ride off into the sunset, with their ill gotten gains safely stowed away. Sure they may lose a few millions in the downdraft, but they’ll still have more socked away than you and I will ever see. We taxpayers will, no doubt, pay to clean up this mess as well.
There is nothing more infuriating then the oft repeated claims of these Wall Streeters that no one could have seen this coming. Anyone who wasn’t raking in big bucks when the getting was good could have seen this coming.
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