07 March 2009

A.I.G. - Why it is appropriate to delay any liquidation/bankruptcy

The main question is not so much whether or not the US insurer AIG should be nationalised, Paul Goldschmidt argues, Keeping the company alive allows time to unwind the complex structures imagined by the high flying sorcerer’s apprentices of finance.

The main question is not so much whether or not the US insurer AIG should be nationalised, but rather to decide whether it is worth while continuing to throw good money after bad into what seems to be a bottomless pit, Paul Goldschmidt argues in his article.

 

Keeping the company alive allows time to unwind, in an as orderly fashion as possible, the complex structures imagined by the high flying sorcerer’s apprentices of finance, Goldschmidt says. Acting in this way, one attempts to avoid an immediate cascade of failures and a total meltdown of the financial system with its incalculable consequences.

 

The author argues that several developments polluted progressively the CDS market:

Ø       CDS became increasingly used as a purely “speculative” vehicle rather than as a legitimate “hedging” instrument.

Ø       the dissemination of information and commentary by the media concerning “spreads” paid by a borrower relative to a benchmark became an “indicator” of the default risk of an issuer

Ø       “innovators” developed a range of new structured products each more complex and opaque in which “counterparty risk” linking the various participants in the structure were considerably underestimated

 

The full article is attached below