Sunday, September 21, 2008


Instapundit points us to Marginal Revolution and asks if we have been bailing out foreign banks.It has indeed. AIG's largest credit swap exposures, totaling $307 billion (and 3/4 of the total CDS/financial products book that forced them into the bailout), were so-called regulatory capital relief swaps, where AIG guaranteed portfolios of prime mortgages and loans. These transactions allow European banks to show much higher 'Tier I' capital by virtue of the AIG guaranty. Hundreds of European banks would have taken an instant hit to capital (or demanded collateral) had AIG defaulted. These swaps, along with the ubiquity of AIG paper in institutional portfolios (including money funds) here, were the systemic effects that caused the Fed to step in.


By Blogger Escort81, at Sun Sep 21, 12:17:00 PM:

Mindles - And the "ubiquity" feature of AIG paper everywhere (and also its many business lines in insurance) is why the feds stepped in for it but not for Lehman, since Lehman was not as interconnected?

The investment banking side of Lehman (M&A advisory and corporate finance / underwriting) was a pretty good group. Unfortunately for it, it was a little group attached to a big hedge fund. Full disclosure: the (now former?)Global Head of IB at Lehman was a classmate and fellow Cheeser.

It will be interesting to see what kinds of new regulations come out of this mess. One of the important regs coming out of the 1930s (with the creation of the SEC) was a limit on margin buying for stocks, so that only so much leverage was allowed into the system. Financial institutions have been able to synthetically create leverage in other ways (including outside of the equity markets), so perhaps new regs will go after those methods.  

By Blogger Andrew Hofer, at Sun Sep 21, 05:28:00 PM:

Lehman paper was in a lot of funds as well, although by the time September rolled around, most of the money funds refused to buy it. Hence their need to file - they couldn't roll over CP.

AIG's emergency was due to collateral calls, not a refinancing problem (not yet, anyway).  

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