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AIG’s losses show credit default swaps the next big domino to fall, possibly hundreds of billions of dollars.

Hiram Abiff
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AIG’s losses show credit default swaps the next big domino to fall, possibly hundreds of billions of dollars.
AIG’s losses show swaps next domino

By Marine Cole
February 18, 2008 12:01 AM ET

Bank's losses, already exceeding $100 billion since the beginning of the credit crunch, are likely to grow much larger if the problems starting to show up in credit default swaps spread.

That threat was underscored last week when insurer American International Group announced a larger than projected decline in the value of its CDS portfolio and said its losses could grow even larger by the time it releases 2007 results, which are due before the end of the month.

The problem is by no means limited to AIG. Indeed, banks are even more exposed as counterparties to CDS underwritten by bond insurers such as Ambac Financial Group and MBIA. CDS function as insurance contracts on the risk of default by bond issuers.

AIG said last week that paper losses on its CDS portfolio climbed to over $5 billion as of the end of November from a previously estimated $1 billion. Counterparties to CDS contracts written by AIG are mostly banks, which bought them to hedge their exposure to collateralized debt obligations.

“Counterparties tend to be banks that wrote the mortgages and then packaged them,” said Chris Winans, spokesman for AIG, who said that AIG executives weren’t available to comment since the company is in a quiet period before releasing 2007 earnings.

AIG said last week that the change in estimated losses came after its auditor, Pricewaterhouse-Coopers, noted a “material weakness” in AIG’s internal control over the financial reporting and fair valuation of the CDS portfolio, which is held by its subsidiary, AIG Financial Products. The AIG subsidiary writes CDS on the super-senior tranches of CDOs on residential mortgage-backed securities.

AIG underwrote a little over $500 billion in super-senior CDS, mostly on securities such as corporate loans, but also including some $78 billion related to CDOs, which have some exposure to subprime and have been losing value.

Despite the losses, analysts estimate that AIG will be able to fulfill its contracts even in the event of widespread defaults.

“We continue to think the firm has ample financial resources to shoulder a reasonable worst-case scenario, which we define as paying out about $10 billion in losses in its credit default swaps business that insure multisector CDOs,” Matt Nellans, a Morningstar analyst, said in a research note last week. “This $10 billion loss would equate to about 10% of the firm’s equity and about three quarters of earnings.”

So while AIG calls attention to the potential for spiraling losses in credit default swaps, bond insurers pose the greater systemic risk. Unlike AIG, the less diverse “monolines” remain greatly undercapitalized, and might not be able to pay claims to banks under the contracts they’ve sold. That means downgrades and defaults would cost the banks a lot more where protection was written by the monolines than where written by AIG. As the credit ratings of CDOs fall, the likelihood of defaults rises, which means that bond insurers need to keep higher capital reserves to keep their triple-A rating as insurers. Meanwhile, fresh capital is becoming more expensive.

Credit rating agency Egan-Jones said about $200 billion is needed to bail out bond insurers. But it’s anyone’s guess at this point. “It’s going to be big but nobody knows,” said Jim Keegan, senior vice president and senior portfolio manager at investment firm American Century Investments. “I’m not sure the monolines themselves know.”

As to the cost to the banks, Standard & Poor’s estimated that they have as much as $125 billion of exposure to bond insurers via hedges through CDS for assets such as CDOs. If the hedges covered about 40% of the face value, this would imply an absolute worst-case loss of $50 billion, S&P added, with Merrill Lynch being the most vulnerable of all banks. Barclays thinks it could cost banks over $140 billion, while Goldman Sachs sees it as between $70 billion and $100 billion.

Jamie Dimon, chief executive officer at J.P. Morgan Chase, said during the Credit Suisse Financial Services Forum this month that a downgrade of a bond insurer could prompt the bank to lose on the order of a “couple hundred million” dollars, according to a report by independent credit research firm CreditSights. And the default of a monoline would have much greater impact, comparable to that of the failure of a major financial institution, CreditSights said. Merrill Lynch, for example, took a hit to earnings of $3.1 billion as a result of losses on hedges arranged through CDS issued by bond insurers, mostly ACA Capital, after the bond insurer lost its investment-grade rating last month.

This is why banks have been enlisted to help bail out the monolines. Greenhill & Co. is working with Ambac and a consortium of eight banks including Citigroup and UBS, to craft a plan. At the same time, New York State insurance superintendent Eric Dinallo has offered his own bailout project. A separate consortium of banks is looking at plans for Financial Guaranty Insurance, another bond insurer.

“Current talk is that the negotiations are focused on unwinding a portion of the swaps used to insure riskier CDOs,” Rob Haines, analyst at CreditSights, wrote last week in a report. “In exchange for commuting a portion of these contracts, the banks would receive an equity stake through warrants.”

Gov. Eliot Spitzer of New York said last week during a congressional hearing that if a recapitalization wasn’t possible and couldn’t be done in a timely fashion, the next step would be to split bond insurers’ business between insuring municipal bonds, which is still sound, and insuring structured finance products, which is where insurers have been struggling.

“Certainly in the near term, we’d like to see a recapitalization,” he said. “If that doesn’t happen, we’d be forced to act sooner than later. We would peel off the municipal business…to restore municipal bonds.” He called it a “good bank/bad bank structure,” which was last seen prominently during the S&L bailout of the late 1980s.

“The concern with a downgrade [of a bond insurer] is that it would have a cascading effect,” Mr. Spitzer said. “It could then generate write-downs at financial services companies.”

But while Mr. Spitzer acknowledged that the potential downgrade of bond insurers would have an “enormous impact” on the financial services sector, he said that the priority was to deal with governments and municipalities, which have seen an increase in their cost of debt as a result of the problems surrounding some bond insurers. That increase could be passed on to taxpayers if the pressure persists.

So even if regulators come up with a bailout plan, it seems inevitable that banks will have to raise more capital to bulk up their reserves as they face more write-downs, with the next round resulting from credit default swaps gone bad. FW

Write to the editors at [email protected]

[link to www.financialweek.com]
Hiram Abiff  (OP)

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Re: AIG’s losses show credit default swaps the next big domino to fall, possibly hundreds of billions of dollars.
This could get real ugly real quick!

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Re: AIG’s losses show credit default swaps the next big domino to fall, possibly hundreds of billions of dollars.
aig needs to speak the truth...

From: Laurel [Ron Paul Revolution]
Date: Sep 17, 2008 10:58 AM

Sep 29, 2006, 01:06

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Democratic Underground Demopedia reports in Who Killed John O’Neill that at the time of 9/11, AIG, the world’s largest insurance company, and subsidiaries Marsh McLennan, ACE and Kroll, were run by the Greenberg family. With Council on Foreign Relations (CFR) member Maurice “Hank” Greenberg as the AIG godfather, the Familia’s tentacles curled around the heart of the tragedy.

Hank’s son Jeffrey, a CFR member as well, was chairman of Marsh & McLennan, situated on floors throughout the North Tower of the World Trade Center as well as the top floors of the South Tower. Marsh also had ties to the CIA. Son Evan Greenberg, a CFR member, was CEO of ACE Limited, situated in Tower 7, which also contained AIG subsidiary Kroll, closely related to the CIA, also with an office in Tower 7.

Tower 7 also contained offices of the FBI, Department of Defense, IRS (which contained prodigious amounts of corporate tax fraud corporate, including Enron’s), US Secret Service, Securities & Exchange Commission (with more stock fraud records), and Citibank’s Salomon Smith Barney, the Mayor’s Office of Emergency Management and many other financial institutions.

Greenberg’s cousin, Alan “Ace” Greenberg, was former CEO of Bear Sterns, where the Bush family, Cheney family George Schultz, James Baker, et al, did business. It is the leading brokerage firm of the great and all-powerful Bush Familia.

Also reported by Democratic Underground, AIG’s Kroll “provided protection services,” among other things, to high level Americans at home and abroad. Kroll had military teams in their company and merged with Armor Holdings on August 23, 2001, adding Defence Systems Limited, another private military corporation, to their operation, and an ex-KGB team called Alpha Firm earlier acquired by Defense Systems Limited. These four teams could have been used on 9/11, part of a “corporatizing” of black ops in tandem with military teams.

According to whistleblower Richard Grove, who worked as a senior manager for SilverStream Software on Marsh and AIG accounts, Kroll also managed the Enron fraud once Kenneth Lay stepped down.

Marsh, immediately after 9/11, established a specialized terrorism team called Marsh Crisis Consultancy (led by L. Paul Bremer III), adding the teams Control Risks Group, a British ex-SAS team and Versar, bio-terrorism and homeland defense team. These players could have known each other from 9/11, bringing in new assignments and profits.

Democratic Underground also reports, AIG allegedly was laundering drug money, and was involved in the Afghanistan oil and gas pipelines. Greenberg and the Adnan Khasshogi family allegedly benefited from the Afghanistan narcotics trade and interests in the oil and gas pipelines, as well.

Greenberg’s Law Firm Connections to Bush

According to www. sourcewatch. org, the Greenbergs were and are connected to the Bush Familia via their Miami-based law firm Greenberg Traurig, LLP, a 1,350-lawyer, full-service international firm. Here are a few connects . . .

1) G-T represented George W. Bush in the Bush-Gore 2000 Florida election vote recount.

2) They personally represent Florida Governor Jeb Bush.

3) They hired son of Supreme Court Justice Antonin Scalia on Election Day 2000 -- after which Justice Scalia cast one of the 5 to 4 deciding votes that placed Bush in the White House.

4) They partially funded/sponsored a delegation to Israel by House-Senate Armed Services Committee members and government contractors to witness and be briefed on interrogations resistance procedures and torture techniques.

5) The firm has prominent administrative positions in Massachusetts 9/11 Fund, which also involves Bush family banking house Brown Brothers Harriman (the same BBH involved with Prescott Bush’s bankrolling the Nazis in World War II).

6) Traurig Greenberg works with 9-11 victims on planning their US government “hushmail/bribery estates.” That is, to receive the money, the victim’s family must sign an agreement never to sue the government for any reason. Victim-wife Ellen Mariani is currently being legally harassed for not signing and for holding the Bush government’s feet to the fire.

7) Bush still owes the Greenberg Traurig firm nearly $1 million for work done by dozens of lawyers and paralegals, leaving questions why a Republican candidate would hire a Democratic lawyer from a Democratic firm. See Greenberg Traurig link above for more scandals.

Greenberg’s Relationship to Larry Silverstein

On July 24, 2001, six weeks before 9/11, Larry Silverstein took control of the lease of all the WTC buildings. This followed the Port Authority decision on April 26.

According to democraticunderground. com, the three companies who originally insured the WTC were AIG, Marsh and ACE, all run as mentioned by the Greenbergs at the time. They then sold stakes of the original contract to their competition, a technique called reinsuring.

Once the Towers came down, the reinsurers got caught holding the bag. This would inextricably tie the Greenbergs to Silverstein and the larger conspiracy of 9/11.
If they had no foreknowledge of events to occur, why would the Greenbergs have unloaded so many stakes in their contract?

According to Michel Chossudovsky in Financial Bonanza behind the 9/11 Tragedy, “On October 17, 2000, eleven months before 9/11, Blackstone Real Estate Advisors, of The Blackstone Group, L.P, purchased, from Teachers Insurance and Annuity Association, the participating mortgage secured by World Trade Center, Building 7.1.” [Blackstone in 2000 also purchased a 50 percent stake in Universal Studios, producers of the myth-perpetuating Flight 93.

“April 26, 2001 the Port Authority leased the WTC for 99 years to Silverstein Properties and Westfield America Inc.

“The transaction was authorised by Port Authority Chairman Lewis M. Eisenberg. This transfer from the New York and New Jersey Port Authority was tantamount to the privatisation of the WTC Complex. The official press release described it as ‘the richest real estate prize in New York City history.’ The retail space underneath the complex was leased to Westfield America Inc.

“On 24 July 2001, 6 weeks prior to 9/11 Silverstein took control of the lease of the WTC following the Port Authority decision on April 26.

“Silverstein and Frank Lowy, CEO of Westefield Inc. took control of the 10.6 million-square-foot WTC complex.

"Lowy leased the shopping concourse called the Mall at the WTC, which comprised about 427,000 square feet of retail space.

“Explicitly included in the agreement was that Silverstein and Westfield ‘were given the right to rebuild the structures if they were destroyed.

“In this transaction, Silverstein signed a rental contract for the WTC over 99 years amounting to 3.2 billion dollars in installments to be made to the Port Authority: 800 million covered fees including a down payment of the order of 100 million dollars. Of this amount, Silverstein put in 14 million dollars of his own money. The annual payment on the lease was of the order of 115 million dollars.

“In the wake of the WTC attacks, Silverstein is suing for some $7.1 billion in insurance money, double the amount of the value of the 99 year lease.” In fact, some $5 billion was actually returned, given the multiple court-case protests of the insurers.

“The mortgaging of the WTC was handled by The Blackstone Group, headed by Peter J. Peterson, current head of the Council on Foreign Relations (CFR). The Blackstone Group also bought a piece of Kroll in 1993 at the very same time AIG took over majority control. Henry Kissinger sits on the board of the Blackstone Group.

By his own admission Silverstein had Tower 7 pulled by controlled internal demolition eight hours after the first two hits. No plane hit Tower 7. There were two small fires in it that were under control. In fact, it takes weeks, months to set up a building to be pulled. So his order to “pull it” catches him in a huge lie. Tower 7 may have been the nexus of the operations. That may have been the real reason to pull it. In fact, it may have been set up weeks in advance with Towers 1 and 2 for demolition. Ironically, Tower 7 is the only tower that has been rebuilt, and more opulently than its predecessor, although tenancy is about 18 percent.

Towers Taken Down for Profit and to Blame Muslims

Given the involvement of the Greenbergs and Silverstein, and other commercial entities that stood to profit hugely, it is difficult to believe 9/11 occurred at the hands of 19 rag-tag Muslims with box-cutters and the help of their leader, Osama bin Laden, sitting in a cave somewhere in Afghanistan with his laptop and dialysis equipment. The real reasons behind 9/11 were financial greed and the willingness to demonize Muslims for the “Pearl Harbor-type” act that would instigate America to wage a war on terror, pursuing PNAC’s (Project for a New American Century) goal of World Hegemony.

The latest documentary on the WTC, The 911 Mysteries from 911WeKnow. com, provides highly convincing proof that the buildings were taken down in six fatal steps. They involved the use of high-powered explosives, including thermite and/or thermate, with techniques more advanced than those of traditional controlled-demolition companies, most likely the military’s, given their bunker buster technology. The six steps are . . .

Pre-collapse sub-basement explosions
Pre-collapse interior blasts
Pre-collapse ground level explosions
Top level collapse initiation
Mid Collapse Squibs (explosions)
Final time-delayed rolls (explosions)

Without all these steps, the Towers could never have free-fallen in 10 seconds, the speed of gravity. Any obstacles or pancaking had to be eliminated otherwise the number of seconds of fall would increase dramatically. The documentary also reminds us that on February 13, 1975 there was a major fire on the 11th floor of the North Tower that did not topple it, though the loss was estimated at over $2 million, no mean event. Check it out.

It is possible that in 1996, when Securacom took over WTC security and installed a new $8.3 million security system, that the explosives and charges were also put in place. Sitting on the board of Securacom was the director Marvin Bush, George Bush’s younger brother.

In any case, this is patently the confluence of the military/industrial complex with a healthy dose of Wall Street, earning millions if not billions in put and call options on companies involved with the catastrophe, including airlines on the down (put) side and military suppliers on the up (call) side. In addition, there is the missing gold from the basement of Tower 4, $200 million of which was retrieved, and an untold amount stolen.

The real bottom line was that the Towers were two financial white elephants. And both Silverstein and Greenberg had to know that. The tenancy was dropping. They were out of date. And most dangerously, they were asbestos bombs, loaded with the dangerous building material when they were completed in 1972-73.

By law the buildings could not be taken down by internal demolition. And since it would cost a billion dollars or more to take the towers down beam by beam, it would be at great loss to the Port of Authority or its leaseholder. Thus the reasons are obvious to take WTC down in act of terror also a false-flag operation. Remember, the concept for the WTC Towers originated with the Nelson and David Rockefeller, members of the Council on Foreign Relations and among the world’s elites. A “New Pearl Harbor” would serve those interests well.

Additional Connections to Greenberg

John O’Neill, mentioned in the first paragraph, was the FBI anti-terror chief who spent years trying to track down bin Laden and “al Qaeda” members. At every point, he was stopped or frustrated by his superiors. Finally, O’Neill parted company with the FBI. Jerome Hauer, who formerly worked for Kroll, got him the job as chief of security at the WTC. On 9/11, O’Neill lost his life in the North Tower.

Mr. Hauer’s job as Kroll chief was also held by Michael Cherkasky, who came out of the New York County District Attorney’s Office, which also brought us Rudy Giuliani, Elliot Spitzer and Patrick Fitzgerald. Mr. Cherkasky also brought Mr. Spitzer into the NYC County DA’s office. Today Cherkasky is a substantial contributor to Spitzer’s campaign for New York State Governor. Cherkasky was bumped up to head Marsh McLennan in 2004.

As an aside, there were about 200 electrical engineers working in the World Trade Center around the time. Additionally, AMEC and Tully Construction played a major role in the clean up of Ground Zero and both have specialized controlled demolition companies.

Lastly, can you believe that one of the Council on Foreign Relations members who engaged President Mahmoud Ahmadinejad of Iran in a debate about the holocaust at CFR’s reception last week was none other than Hank Greenberg, who said he witnessed the Dachau camp as Germany fell? Could it all possibly be payback and then some?
Jerry Mazza is a freelance writer living in New York. Reach him at [email protected]
~we(me,kalindi,nimai and our unborn) need some help.
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