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Where did the money go? ::

Yesterday I wondered: if the banks are all broke and need to be bailed out, who’s got the money? Actually, I think the answer is that the money was an illusion which has evaporated. I came across AIG’s Dangerous Collapse & A Credit Derivatives Risk Primer [via]:

Indeed, we unfortunately have two very good examples of what happens when systematic correlated risks meet credit derivatives, when it comes to MBIA and Ambac. Until recently, these two bond insurance companies were bullet-proof financial titans, with the unquestioned, gold-plated “AAA / Aaa” ratings to prove it. Armed with ample layers of capital, these two firms could by themselves essentially protect the creditworthiness of the entire nation against recession and even depression—on paper, according to assumptions used by the rating agencies and the rest of the financial system.

Aha! It’s their fault! :-/

Unfortunately what we saw actually happen in the real world with mortgage derivatives was just the reverse of the theory. The multiple layers of the so-called “smartest person in the room” became multiple layers of people making steadily worse (and more obvious) mistakes in the pursuit of short-term profits until the situation not just predictably—but inevitably—collapsed upon them.

...

Which again brings up the question of what happens if a real recession hits the $62 trillion credit derivatives market?

Perhaps we’re finding out.

<< Righteous Kill

2008 > September

Rescuing Wall Street >>

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