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European involvement in the US credit crisis AIG

by rootless2 Thu Nov 19th, 2009 at 11:33:26 PM EST

The "independent" inspector" of the US bailout issued a report on the AIG bailout. Table 2--Total Payments to AIG Credit Default Swap Counterparties
(in billions) (collateral, cash, total)

Société Générale                            6.9                   9.6  16.5
Goldman Sachs                               5.6                   8.4  14.0
Merrill Lynch                               3.1                   3.1   6.2
Deutsche Bank                               2.8                   5.7   8.5
UBS                                         2.5                   1.3   3.8
Calyon                                      1.2                   3.1   4.3
Deutsche Zentral-Genossenschaftsbank        1.0                   0.8   1.8
Bank of Montreal                            0.9                   0.5   1.4
Wachovia                                    0.8                   0.2   1.0
Barclays                                    0.6                   0.9   1.5
Bank of America                             0.5                   0.3   0.8
The Royal Bank of Scotland                  0.5                   0.6   1.1
Dresdner Bank AG                            0.4                   0.0   0.4
Rabobank                                    0.3                   0.3   0.6
Landesbank Baden-Wuerttemberg               0.1                   0.0   0.1
HSBC Bank, USA                              0.0*                  0.2   0.2
                           Total           27.1**                35.0  62.1


During these negotiations, an FRBNY executive vice president and senior vice president contacted the Commission Bancaire 25 to inform them that the FRBNY was conducting negotiations with Société Générale and Calyon, two of the counterparties with the largest credit default swap contracts with AIG, and was requesting their support. The Commission Bancaire then contacted the firms. The Commission Bancaire spoke again with FRBNY and forcefully asserted that, under French law, absent an AIG bankruptcy, the banks could not voluntarily agree to less than par value for the underlying securities in exchange for terminating the swap contracts. Thus, the French banks claimed they were precluded by law from making concessions and could face potential criminal liability for failing to comply with their duties to shareholders.
As of September 30, 2009, AIG had $172 billion in exposure to swaps in its foreign regulatory capital portfolio. The portfolio contains swaps purchased by financial institutions, principally in Europe, to provide regulatory capital relief under Basel I. 33 AIGFP's COO informed SIGTARP in July 2009 that they expect that most of these swaps will be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II. Currently, financial institutions are required to hold a certain level of capital against their assets, and one way for a financial institution to reduce the amount of capital is to purchase swap protection on its assets. However, new requirements decrease the level of capital required for such assets and, in most cases, there will be limited capital benefit to holding on to the existing swaps. Nonetheless, AIG warned in a June 29, 2009, SEC filing that if credit markets deteriorate, the company may recognize unrealized losses in AIGFP's regulatory capital credit default swap portfolio. 34 AIG could continue to be at risk if the swaps in its regulatory capital portfolio are not terminated by the end of first quarter 2010 as expected.

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I removed a large amount of spurious linebreaks for the diary body - I don't have time to fix the table above the fold now.

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En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Nov 20th, 2009 at 04:19:29 AM EST
Table now fixed using <pre> tags.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Nov 20th, 2009 at 05:12:12 PM EST
[ Parent ]
So much for Barclays claims that "we didn't take any bailout money"...
by Metatone (metatone [a|t] gmail (dot) com) on Fri Nov 20th, 2009 at 05:42:22 PM EST
Why wasn't AIG allowed to go bankrupt?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Nov 20th, 2009 at 05:50:18 PM EST
Might have resulted in economic warfare?
by nanne (zwaerdenmaecker@gmail.com) on Fri Nov 20th, 2009 at 06:02:44 PM EST
[ Parent ]
Unlike Lehman?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Nov 20th, 2009 at 06:24:39 PM EST
[ Parent ]
If you read the report, you can see a plausible account that the fear that AIG dying the day Lehman died was too scary.
by rootless2 on Fri Nov 20th, 2009 at 09:40:13 PM EST
[ Parent ]
Good point.

By the way, you forgot to link to the report?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Sat Nov 21st, 2009 at 03:54:40 AM EST
[ Parent ]
I'd speculate that there were 2 or 3 possible outcomes

  1. Everyone saves the TBTF banks / financial institutions
  2. Everyone nationalises TBTF banks (plus a load of other banks), while wiping out out much of the creditors
  3. Uncoordinated collapse

I'd also speculate that while option 2 was possible, the creditor nations (Germany, Japan, China, Middle East oil states) wouldn't have been too happy about it and might have responded in an unfriendly manner. So international coordination settled on 1.
by nanne (zwaerdenmaecker@gmail.com) on Sat Nov 21st, 2009 at 06:23:56 AM EST
[ Parent ]
The theory I heard is that Eastern Europe would have collapsed through the French and Brit banks were nominally on the books for assets they had dumped on Hungary and Baltics.
by rootless2 on Fri Nov 20th, 2009 at 09:38:44 PM EST
[ Parent ]
I recall a stated fear that if European banks lost their CDSs, they would be forced to call in loans they had made to East European banks so as to meet regulatory requirements.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 21st, 2009 at 10:35:16 AM EST
[ Parent ]


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