Word: swap
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...there's a true insight into this mess if you just step back and consider the bigger picture, not just AIG. Regardless of the details of the various swap contracts, they all represent potential transfers of wealth between financial institutions. If we consolidated the entire financial sector, all these debts would effectively vanish...
...institutions together, no money was truly lost - it's what economists call a zero-sum game. In good times, risk-hungry banks loved this game, but now they have become risk-averse, and the game seems to have changed. So how can many of the banks simultaneously claim enormous swap losses without a single bank claiming significant profit...
...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 rewrite similar contracts with hedge funds...
...most direct solution for the swap problem is to settle all such agreements and eliminate their uncertainty from the equation. If the payments are reversed, or the payments are stopped, or they are settled once and for all, the uncertainty will vanish...
...time of pessimistic forecasts and rising fear, many toxic assets are probably worth more than the bank models or credit-default-swap indexes suggest. For example, a recent reading of the ABX index puts the value of even the highest-rated subprime mortgage bonds created in 2007 at only 27% of their precrunch prices. Yes, Americans are behind on their mortgages, but even the most pessimistic prognostications do not predict that 73% of home loans will become worthless. (See pictures of the dangers of printing money...