All the money in the world

Bubbles are not, contrary to the new CW in the zona, all bad. Law’s system, some think, actually liquidated the immense debts left by Louis XIV and gave a massive impetus to the restructuring of French agriculture and artisanal industry.

But the Greenspan system seems to have expanded so fast and gotten to such size that it might well engulf all the gains made along the way and then some. A sign of this: the sinking of AIG. Here is a company that is burning its way through 120 billion dollars in 3 weeks time. In three weeks time, he repeated, trying to sound like the George Segal character in To Die For. From today’s story in the NYT:

“These accounting questions [that is, how much of a hole AIG was in because of its position as a counterparty] are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.”

As I said in my vulture of doom post about the bailout, there is not enough money in all the world to successfully bail out the system. The managers of the great Popping sound (the sound of 100,000 hedge funder penises exploding all at once) have established a nice rhythm for the deathfuck: they come up with a solution and for a month, a relative calm prevails, and then another shoe drops. From last week to this week, the new idea is that the worst is behind us. So the markets go happily upward. But do we have any reason whatsoever to think that counterparties are now protected from the almost sure consequence of housing prices dipping another ten percent? I don’t think so. The write downs have been so many stabs in the dark. Meanwhile, every developed nation has put its government money on the line – a unique event! – to stop the oncoming tide of losing bets. All the money in the world, in other words, is on the line, because more than all the money in the world has been bet. Eventually, many of those bets will simply have to be canceled. Sorry charlie! And as the players don't even know they made the bets - charming megachurch x in San Diego, the school system in Xville, Minnesota, the Icelandic Tuna Fisherman's pension fund, and so on - this will not be happy. As every fan of cheap sadomasochistic entertainment knows, surrender is a long process, but game by game one gets to that final, liquid moment of mutual pain and cumming. It isn’t Wall Street, among the cheesy films of the eighties, that describes the current situation. It is 9 ½ weeks.

“Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.”