They really did fuck us all.
Avoiding being deemed "insurance" has much more to do with avoiding all the hassles of dealing with 50 different state departments of insurance rather than having to set aside reserves. As a regulated insurance product it can take years to make changes to pricing or contract.
@3: so, IOW, they did it to avoid being deemed insurance.
Excellent article, Mr. M, but . . . .

"the lack of an insurance reserve as a key structural weakness of CDS"

Although superficially correct, the phrasing is incorrect or misleading, as it isn't a key structural weakness, unless one considers a Ponzi scheme to be a key structural weakness or a bank robber to be a key structural weakness or a serial killer to be a key structural weakness!

It is a beautiful tool of financial fraud, which originated --- of course! --- from JPMorgan Chase ("Chase") which has been recently fined for every financial fraud under the Sun, as it has continuously been fined for every financial fraud under the Sun from 2000 on.

The naked swap is structured the same as a covert attack on one's neighbors: illegally taking out one thousand insurance policies against your neighbor's house burning down, then sneaking over in the middle of the night and setting it on fire, then collecting on those one thousand insurance policies --- which is exactly how John Paulson (hedge fund dood) and Goldman Sachs made a fortune on such CDOs as Abacus CDO, Timberwolf CDO and Point Pleasant CDO, etc.

They criminally conspired to put together trash CDOs, then purchased CDSes (naked credit default swaps on Paulson's end) at $1.4 million a pop with a payout of $100 million a pop upon a credit event, or indicator of failure of the specific CDO. (So Paulson purchased a number of naked swaps, and that is how he made is so-called risk-based fortune of billions by "betting against the mortgage markets" when it really wasn't any type of bet whatsoever!)

There was AIG, but they by far weren't alone in this matter, simply directly connected to JPMorgan Chase ("Chase"), Goldman Sachs and Morgan Stanley.

There were various hedge funds/private equity types like Magnetar Capital, etc., whose deals failed over 90% of the time, but thanks to those credit default swaps against said failed deals, they walked away with hundreds of millions and many billions!

When Bearn Stearns was having a bull run against them (financial trails point to Chase, Goldman Sachs and Deutsche Bank) to destroy that firm, there were $2 trillion worth of CDSes against $190 billion of outside debt of that firm (Bear Stearns), with an unimaginable payout, etc.

The levels of credit derivatives sold far exceeded the entire Global GDP by a factor of 100 or more, with the number of CDSes again far exceeding the Global GDP.

Private equity firms (Blackstone Group, Citadel, KKR, TPG, etc.) utilize a similar process among their repertoire of financial fraud manipulation when they do a leveraged buyout of a targeted company, then perform various assets stripping of said company, and take out CDSes (again with leveraged loans, or structured finance) against the soon to fail company's bonds, or other financial instruments, etc.

A financial fraud is a financial fraud, and that's a simple fact.

From the Bankster File:………

And neoclassical thinkers have the audacity to call all of this scheming and scamming economics.

Actually, as any of them will tell you if you bother to ask, they call it Finance, and regard it as a very different and far less reputable discipline.

It is only the bumpkins, the country people, who do not know of the difference between Economics and Finance. This is a difference only an urban person comes into contact with day-to-day, one that makes sense only in the context of a large city of people wheeling and dealing with each other.
I don't think it was actually common to try to get people to buy both a CDO and CDS on that particular CDO. That would largely defeat the purpose. What people were doing is writing CDS on CDOs so as to create "synthetic" CDOs. This famously allowed people to "go short" on CDOs, and this was not free from abuse:…

To put it simply, a CDO includes a bunch of financial assets that (if all goes well) provide cash flow, which is then used to pay investors according to a "waterfall" (that is, first the top tranche is paid, then the next tranche, and so forth, which allows the top tranche to be safer than any particular asset in the pool). So let's say you've assembled a pool of assets for inclusion in a CDO (CDO 1). You can then have another vehicle write a bunch of CDS on CDO 1. This second vehicle (CDO 2) will receive cash flow from the premiums on the CDS. That cash flow is itself tranched, and in fact the cash flows resemble the cash flows from CDO 1. CDO 1 is "physical," CDO 2 is "synthetic" (because its underlying assets are derivatives, not cash assets).

The difference between CDO 1 and CDO 2 is that someone has to buy the CDS issued by CDO 2. Someone has to "buy the insurance policy." And that someone is someone who thinks CDO 1 is going to collapse. So the use of CDS to create a bunch of synthetic CDOs accomplished two things: (1) it allowed more investors to "get exposure" to the risks that had been bundled into physical CDOs, and (2) by the same token, it allowed other investors to "go short" on physical CDOs (that is, bet that they would fail).

Of course since the whole market was crazy in the first place, the whole thing looks ridiculous today. But one could argue that if there had been more opportunity to "go short" the mortgage market, intelligent investors would have taken the opportunity to do so, and there would have been earlier "price discovery" in the mortgage market (that is, the presence of a lot of short interest in the market would have kept prices from getting so far from reality).
Surprised to see Charles buying the propaganda line that AIG had to be bailed out... Actually it is looking like the government forced the bailout on AIG in order that AIG's bank counterparties would not have to write down AIG's obligations to them. Don't you read NC?…
kind of like Scientology calling themselves a religion; provides all sorts of legal shelter from scrutiny, taxes etc. Every smart business should acquire religious status. You don't even need a god.

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