Another View

March 6, 2009 10:12 a.m.

TPM Reader SG’s take on the derivatives, bankruptcy and AIG issue …

I beg to differ with GG on two points. First, the subsidiaries of AIG are insurance companies that are by law required to have enough reserves to manage situations like this, thanks to the remnants of Glass Steagall of course.  Now, I am not an expert on insurance biz but this claim by GG seems doubtful to me.  Second, I have traded derivatives myself and know this much that the market professionals (not the amateurs who think they have info) already have enough info on what AIG owes to whom and they are benefiting immensely by this weired Geithner process.  They are getting out calmly and coolly while the rest will be left holding the bag.  So, GG’s contention that if Geithner releases the names it will have this domino effect doesn’t pass the smell test on any count.  People who trade derivatives tend to be people who are in the KNOW and by definition know what is owed to whom.  Geithner releasing this info won’t have any effect because this is already known to the “market” just not to the ordinary citizen who by definition again DOES NOT KNOW and DOES NOT TRADE these instruments.  If you don’t believe me then ask Prof. Krugman.  My claim is that this is just all a hoax to let the wall street buddies get out while the going is good and then let these institutions fail.  Outcome will be the same whether the info is released now or later…”controlled-depression.”

Back to the earlier question of what the argument would be for allowing derivatives to hop to the front of the line in bankruptcy proceedings. A number of very generous readers have written in and try to explain the arguments to me, whether they agree with those arguments or not. I think I understand it. But nearly well enough that I’m going to embarrass myself by trying to explain it to you. Having said that, my takeaway from the discussing is that a lot of this has to do with further gaming the difference between derivatives and insurance. Namely, the folks working with derivatives want them to be insurance when the issue is the ‘rights’ insurance has in bankruptcy proceedings but not be insurance when it comes to falling under the regulatory regimes that very tightly control actual insurance.

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