Word: bankses
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Moreover, investors and banks that hold credit-default swaps do not necessarily own the tranches of mortgages and bonds that the CDSs insure. AIG may have even written multiple swaps over the same mortgages and bonds. It would be as if an insurance company had sold earthquake insurance on one...
Think again of the insured house. Many institutions hold insurance on the house; on the other side are insurance companies and the like making an opposite bet. If the house is destroyed, one group of institutions wins and the other group loses. Considering all institutions together, no money was truly...
Here are two possibilities: either the vast majority of all swaps - not just AIG's - are held by investment banks, or a significant portion is held by other financial institutions like hedge funds. Suppose all swaps are held by banks. Since swaps are a zero-sum game, the banking industry...
Whichever it is, if the number of institutions involved in swap-trading were limited to those trading with AIG, then AIG is probably not too big to fail. We have to worry about chains of claims. Just because AIG dealt only with banks does not mean those banks did not...
The problem with keeping the swaps on the banks' books is that their potential payoff or loss is random, depending on the particular details of the contract and various outcomes in the world. Moreover, banks today are risk-averse and often factor worst-case scenarios into current pricing. Thus, they...