The Real Deal About AIG

[JRSWRITER]

From The Ramparts
Junious Ricardo Stanton


“Credit default swaps are non-standardized private contracts between the buyer and the seller. They are not traded on any exchange, and have remained unregulated by any government body. The International Swaps and Derivatives Association estimates the total amount of outstanding credit default swaps to be around $ 62.2 trillion, making these contracts the most widely traded credit derivative product, as of December 2007.Due to the lack of regulation in the market for CDS, these instruments had been underwritten by almost any financial institution. Large insurers such as American International Group (AIG) and Ambac Financial Group (ABK) have been major players in the market in the past. However, such contacts are also written by hedge funds, mutual funds and banks such as Merrill Lynch (MER), Citigroup (C) and Morgan Stanley (MS).” Credit Default Swap (CDS))

The corporatist media which is owned by a very small cabal with interconnecting relationships to other wealthy individuals and corporations, is not telling the truth about the current economic meltdown. The mind control apparatus’ focus on the bonuses paid to traders for American International Group (AIG) is a smoke screen. AIG is being underwritten and kept afloat by US taxpayers, so if that’s the case why doesn’t the major stockholder in AIG the US government simply stop the bonuses from being paid out?

AIG is one of if not the largest insurance company in the world. Like most insurance companies AIG sells insurance policies and requires the buyers to pay for the policies they write; usually in installments. AIG insured autos, homes, businesses and in recent years succumbed to the allure of a new product called Credit Default Swaps. Credit Default Swaps aren’t illegal. In fact they make good sense if they are handled responsibly. A credit default swap is an insurance policy against default on a business deal, a debt or a loan. “Credit default swaps, or CDS, are insurance against the risk of default on a debt (such as loan, bond etc.). The writer (seller) of these swaps receive regular payments from the buyer (in most cases, in addition to an up front payment), and in turn assumes the risk that the underlying debt will not be repaid. In the event of default, the seller of the contract has to reimburse the buyer for the unpaid interest and the principal of the debt.” Credit Default Swap

Insurance companies employ mathematicians called actuaries whose job is to calculate and predict statistical probabilities for deaths, major disasters, debilitating injuries, illnesses, financial success or failure. “Actuarial Science is a fairly unique blend of mathematics, economics, and real world business understanding, all designed to give an understanding of sound practical ways in which financial risk can be managed. The prototype examples of where actuarial science would be particularly relevant are in the running of insurance companies and pension funds. In return for investing people's money, a promise has been made to pay out some benefits in the future. Actuarial science is needed to deal with the uncertainty of how much will need to be paid (amount) and when (timing). The amount and timing variables can be modeled mathematically to produce a workable model of the monetary liability today. The statistical distributions and methods will vary widely depending on the nature of the liability - modeling car accidents, latest industrial disease claims, and how long someone will need a pension to be paid for all different, and also carry varying economic cost.” Why Study Actuarial Science? Actuaries are the ones who calculate the risk of insuring a certain type of person over a short or long period of time, a specific model car, the best way to structure a pension plan or the probability of the default of a loan or business. Actuaries usually work for insurance companies, financial institutions and government agencies.

So if actuaries are so smart what happened? How did people who make their living crunching numbers, studying tables and reviewing socio-economic data to determine trends and risk levels not see the dangers in all this? The problem is their actuarial tables and formulas didn’t take into consideration the massive deceit, fraud and criminality of Wall Street and the Shadow Banking System. There is an old saying, “figures don’t lie but liars are always figuring” which explains why and how this debacle happened. Wall Street MBA wiz kids cooked up new schemes and created new vehicles such as hedge funds, credit default swaps, derivatives, securitization of debt collateral using mathematical formulas. In their exuberance to get rich quick and keep the economy afloat not by the old fashioned way of expanding production but by the manipulation of debt, they didn’t care what the consequences of their Ponzi schemes and speculative bubbles would be. They took a legitimate business model and turned it into a monstrous tool for speculation and fraud.

In recent years Credit Default Swaps moved beyond being a legitimate business vehicle and morphed into an instrument for rampant speculation. Instead of a direct contractual agreement between principles in a particular business, individuals who had no standing or involvement in the business or the transaction at all could take out a policy on the company, transaction or the principles as a hedge or bet about whatever the buyer wanted to bet on. Credit Default Swaps became a form of gambling and speculation. The inherent problem in all this is greed. Insurance companies like AIG sell the policies and they sold thousands; but instead of keeping a reserve to cover losses or payouts they took the money and ran. The buyers, because most of the policies were so large, only made down payments or partial scheduled payments. So when a company failed to pay dividends, meet it’s projected profits, pay off its bonds or whatever the buyer was betting on or against, the insurance company was forced to pay both the principle and interest to the buyer(s) even if they had not collected the full face value of the policy.

The whole system is interconnected which is why we see the global financial system imploding. This is why Iceland went belly up and why Ireland, Spain and Greece are in trouble. This is why Britain and the European Union are scrambling to save their largest banks via nationalization. US Banks and mortgage companies engaged in predatory lending. The US government and media promoted reckless consumerism. The banks pushed sub prime loans on home buyers, who wanted to experience the “American Dream”. Financial institutions promoted commercial real estate expansion, pensions invested in hedge funds that invested in these mortgages, real estate deals and securitized debt. The Bond rating companies rated these exotic sounding transactions AAA or BBB and raked in huge profits despite failing to do their due diligence to see if they were really sound investments. Hedge funds bought and sold large volumes of stock, sending stocks up and down thus impacting companies’ bottom line. On one hand manipulators used “legal” tricks like naked short selling and leveraged buy outs to impact companies status while on the other hand speculators and inside traders earned or lost money on their Credit Default Swap bets. Unregulated derivatives, mortgage backed securities, debt obligations and credit default swaps were sold globally which is why the world economy is now teetering on the brink of total collapse.

AIG and other large insurance companies sold credit default swaps to all types of individuals, commodities exchanges (oil, precious minerals food etc) and consortiums. Once the subprime and commercial real estate mortgages started to default, securitized bonds started defaulting, hedge funds started cashing in on their CDS policies, then banks and insurance companies started to fail en mass because of the ripple effect. AIG the world’s largest insurance company was holding trillions in Credit Default Swaps and it went belly up. To prevent a major catastrophe, Paulson, Bernanke and Wall Street white-mailed the US Congress into bailing Bear Sterns and AIG out. They chose to let Lehman Brothers fail (either for dramatic effect or to get back at certain individuals and countries who used that particular investment bank). The corporate media picked up on it and it has been in the news ever since. Don’t believe the hype. It’s not about the bonuses, its deeper than that. This is all a smoke screen to hide the multi-trillion dollars in derivative and CDS liabilities that are still out there that have infected and threaten to wipe out the whole system.