Friday, December 26, 2008

Doublemint Bailout

Wall Street Journal
December 26, 2008

A fund (that would be you - AM) has bought an additional $16 billion in collateralized debt obligations from AIG that was insured through credit-default swap contracts.

The CDO purchases allow AIG to cancel an equivalent amount of CDS contracts its finance subsidiary had written on those securities, relieving some of the financial pressure that led the government to step in to help the troubled insurance giant in September.

The Maiden Lane III fund paid $6.7 billion to buy the latest batch of CDOs, while CDS counterparties kept $9.2 billion of collateral. (What is not mentioned is that the 9.2 billion is effectively a bailout of the counterparty. This article is written in such a way that one might assume that the Federales are paying 6.7B for 16B face. Hence they paid 40%. Au contraire - Federales are paying 16B for 16B face and only the Good Lord knows what it is worth. My guess, maybe a nickel. This was 2 bailouts in 1!-AM)

So far, Maiden Lane III has bought $62.1 billion of such CDOs at a cost of about $24.3 billion (well not exactly like the example above we gave away the collateral - AM) AIG said, adding that it is looking for ways to eliminate the remaining $12.3 billion. (The other 12.3 Billion? - a collaterized garbage truck - $2.6 billion of remaining physically-settled CDS and approximately $9.7 billion of "cash-settled" or "pay-as-you-go" CDS in respect of protected baskets of reference credits (which may also include single name CDS in addition to securities and loans) - AM).

Maiden Lane III was formed by AIG and the New York Fed last month to try to resolve the insurance firm's bad bets on CDS contracts.( A taxpayer redistribution for speculative bets made by rich folks - AM) AIG invested $5 billion in equity and the Fed has agreed to lend as much as $30 billion.

The entity will collect cash flows from the CDOs to first pay off the Fed's loan and then repay AIG's equity investment. After that, if there are any profits, they would be split 67% to the Fed and 33% to AIG. (I look forward to that reporting, I'm sure the results will be transparent, don't you? - AM)

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