Who’s Gaining from the AIG Unwinds?

Posted on March 29, 2009 by Felix

Tyler Durden has a scary post up, connecting banks’ profitability in January and February to the fact that those were the months when AIG Financial Products was unwinding an enormous number of its contracts en masse. These trades, initiated by AIGFP, were allegedly enormously profitable for the biggest banks in the CDS market:

The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades – ever"…

I can only guess/extrapolate what sort of PnL this put into the major global banks… I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

If this is true, then (a) the banks still aren’t anywhere near sustainable profitability, and (b) those AIG retention bonuses — paid on the grounds that only the people who got AIG into this mess could get it out — are even more egregiously untenable than we had suspected.

The whole point of having the government take over AIG was that it wouldn’t need to enter into panicked unwinds. If it went ahead and did that anyway, the levels of competence and oversight at AIG are even lower than most of us had thought. Which is quite an achievement.

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5 Responses to Who’s Gaining from the AIG Unwinds?

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    Hi…yes it is very credit derivative wonky. the main take away here is that AIG wrote many credit default swaps on portfolios of bonds (corporate and mortgage)to Wall Street counterparties. The unwound these swaps with the counterparties in January and Feb. According to the trader in Zero Hedge’s piece, these swaps were unwound at very favorable levels for the counterparties. The counterparties had trades against these portfolio swaps….CDS or credit linked notes on single names (like GE or a particular CDO tranche). The counterparties took those trades off, netted big gains against the trades AIG tore up and made billions.

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  5. Mary Ann says:
    July 24, 2012 at 6:18 pm

    SO true. Oh well~’the banks still aren’t anywhere near sustainable profitability’ well I think it won’t be changing to something much better.

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