AIG falling apart?

Lately, we see how stock market in U.S. fell miserably, with some big companies like Lehman Bros., AIG (American International Group) and some other major companies facing liquidity crunch. Curious me went in to the web and found out why. But this certainly is not one-reason-fits-all why they fell. Many factors contribute to it all at the same time. The article below is quoted from Reuters 2008 as written by Adam Davidson.

Why AIG fell apart?
(The Big Money) When you hear that the collapse of AIG or Lehman Bros. or Bear Stearns might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure (OK, still obscure) instrument known as a credit default swap.

So, what is a CDS, and why is it so dangerous?

At first glance, a credit default swap seems like a perfectly sensible financial tool. It is, basically, insurance on bonds. Imagine a large bank buys some bonds issued by General Electric. The bank expects to receive a steady stream of payments from GE over the years. That's how bonds work: The issuer pays the bondholder some money every six months. But the bank figures there's a chance that GE might go bankrupt. It's a small chance, but not zero, and if it happens, the bank doesn't get any more of those payments.

The bank might decide to buy a CDS, a sort of insurance policy. If GE never goes bankrupt, the bank is out whatever premium it paid for the CDS. If GE goes bankrupt and stops paying its bondholders, the bank gets money from whoever sold the CDS.

Who sells these CDSs? Banks, hedge funds, and AIG.

It's easy to see the attraction. Historically, bond issuers almost never go bankrupt. So, many banks and hedge funds figured they could make a fortune by selling CDSs, keeping the premium, and almost never having to pay out anything.

In fact, beginning in the late '90s, CDSs became a great way to make a lot more money than was possible through traditional investment methods. Let's say you think GE is rock solid, that it will never default on a bond, since it hasn't in recent memory. You could buy a GE bond and make, say, a meager 6 percent interest. Or you could just sell GE credit default swaps. You get money from other banks, and all you have to give is the promise to pay if something bad happens. That's zero money down and a profit limited only by how many you can sell.

Over the past few years, CDSs helped transform bond trading into a highly leveraged, high-velocity business. Banks and hedge funds found that it was much easier and quicker to just buy and sell CDS contracts rather than buy and sell actual bonds. As of the end of 2007, they had grown to roughly $60 trillion in global business.

So, what went wrong? Many CDSs were sold as insurance to cover those exotic financial instruments that created and spread the subprime housing crisis, details of which are covered here 1. As those mortgage-backed securities and collateralized debt obligations became nearly worthless, suddenly that seemingly low-risk event-an actual bond default-was happening daily. The banks and hedge funds selling CDSs were no longer taking in free cash; they were having to pay out big money.

Most banks, though, were not all that bad off, because they were simultaneously on both sides of the CDS trade. Most banks and hedge funds would buy CDS protection on the one hand and then sell CDS protection to someone else at the same time. When a bond defaulted, the banks might have to pay some money out, but they'd also be getting money back in. They netted out.

Everyone, that is, except for AIG. AIG was on one side of these trades only: They sold CDS. They never bought. Once bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have thought CDS were just an extension of the insurance business. But they're not. When you insure homes or cars or lives, you can expect steady, actuarially predictable trends. If you sell enough and price things right, you know that you'll always have more premiums coming in than payments going out. That's because there is low correlation between insurance triggering events. My death doesn't, generally, hasten your death. My house burning down doesn't increase the likelihood of your house burning down.

Not so with bonds. Once some bonds start defaulting, other bonds are more likely to default. The risk increases exponentially.

Credit default swaps written by AIG cover more than $440 billion in bonds 2. We learned this week that AIG has nowhere near enough money to cover all of those. Their customers-those banks and hedge funds buying CDSs-started getting nervous. So did government regulators. They started to wonder if AIG has enough money to pay out all the CDS claims it will likely owe.

This week, Moody's Investors Service, the credit-rating agency, announced that it was less confident in AIG's ability to pay all its debts and would lower its credit rating. That has formal implications: It means AIG has to put up more collateral to guarantee its ability to pay.

Just when AIG is in trouble for being on the hook for all those CDS debts, along comes this credit-rating problem that will force it to pay even more money. AIG didn't have more money. The company started selling things it owned-like its aircraft-leasing division 3. All of this has pushed AIG's stock price down dramatically. That makes it even harder for AIG to convince companies to give it money to pitch in. So, it's asking the government to help out.

AIG might be in trouble. But what do I care? Because the global economy could, possibly, come to a halt.

Banks all over the world bought CDS protection from AIG. If AIG is not able to make good on that promise of payment, then every one of those banks has lost that protection. Overnight, the banks have to buy replacement coverage at much higher rates, because the risks now are much worse than they were when AIG sold most of these CDS contracts.

In short, banks all over the world are instantly worth less money. The numbers seem to be quite huge-possibly in the hundreds of billions. To cover that instantaneous loss, banks will lend out less money. That means other banks can't borrow to pay this new cost, and weaker banks might not have enough; they'll collapse. That will further shrink the global pool of money.

This will likely spur a whole new round of CDS payouts-all those collapsed banks issue bonds that someone, somewhere sold CDS protection for. That new round of CDS payouts could cause another round of bank failures.

Generally, with enough time, financial markets can adjust to just about anything. This, though, would be an instantaneous transformation of the global financial system. Surely, the worst part will be the confusion. CDS are largely over-the-counter instruments. That means they're not traded on an exchange. One bank just agrees with another bank to do a CDS deal. There's no reliable central repository of information. There's no way to know how exposed a bank is. Banks would have no way of knowing how badly other banks have been affected. Without any clarity, banks will likely simply stop lending to each other.

Since we're only just now getting a handle on how widespread and intertwined they have become, it seems possible that AIG, alone, could bring the global economy to something of a standstill. It's also possible that it wouldn't.

For nothing is certain in investments, here's another article on how this insurance company fell into the pool of debt - Buffett's time bomb goes off on Wall Street

'right' and un'right'

This will be a quick post before leaving to school.

I found that there is no such thing as 'right'. Other than placing a clear distinction between right and wrong in mathematical equations, scientific curiosity and religious beliefs, everything else in the world is subject to change.

For example, questioning the ethics of one's action/decision is very much a debated issue with no shades of grey. The 'hot' issue surrounding our country regarding the remark by Ahmad Ismail and the subsequent consequences involving medias and politicians had me thinking if their actions are right, ethical and justified. What's worse is that both contrasting sides prove themselves to be doing the right thing. I am not sure which side is right now, not to mention the trust I put in them when I cast my vote last March, believing that they will do the right thing for the nation.

So, you see, there is no such thing as 'right'. The word 'right' is too much a responsiblity to bear and its consequences which might involve others. When people say they are doing the right thing, what they really mean is that they are doing the acceptable thing within the context of the situation and its culture and norm.

It's about doing the thing/decision/action acceptable by many and majority - not necessary the right thing.

To conclude, there is no such thing as wrong answer now. Even scientific justification has its fault in it, and scientists are constantly questioning it. Galileo's idea that the Earth moves around the Sun which was first banned and rejected by many and also the Church, was proven to be right later.

Who doesn’t want to be great?

In the heart of every human being, there is a deep longing to be great at something we are doing. Whether it’s being great in achievement or fame, we yearn for it, believing that that greatness or success will in some ways signify the meanings of our lives.

Living in the world where money is one of the hottest-topics for conversation among working-class people, we often perceive being great as to be successful and prestigious. Money is used to measure one’s success and publicity reflects how well one is respected and looked highly upon.

There are so many people who have made themselves to the world-greatest-people-list like Bill Gates, the late Pope John Paul II, Donald Trump, Obama, Tyra Banks, Nelson Mandela, David Beckham, and even Jerry Springer to list a few. Some did it to gain the attention of the world to see how well-off or ‘wonderful’ they are, while some did it for the good of others – they are those who self-sacrifice for the good of mankind and for peace of the world.

Having said that, who doesn’t want to be great?

I am one of those who want to be great one day. In fact, I want to be rich one day if I can. I have a draft plan of what I will become when I am 30 years old. I want to earn big bucks and achieve big dreams which can satisfy all my needs and wants. When I was in the final year in QUT, I came to realize that I am capable of achieving anything I want in life. I want to stand out from the rest.

However, there’s always something holding me back. I realize that things I want in life may not be the things that really matter. Often, I had to stop walking, and reevaluating my purpose in life. In other words, I am constantly reminded to reevaluate where I am now and what I am doing now.

Some parts of me are afraid that I will one day regret doing what I have been doing, having to make the wrong choices, and neglecting the things that really matter to me.

And thank God, today I came across a verse in WYD article which I have found an answer to believe in. Our Lord Jesus says, “For the one who is least among you is the one who is the greatest” (Luke 9:48).

The verse is described as,

“The least are the humble and pure of heart, those – who far from weak and timid – are strong enough in spirit not to have to big note themselves or be the centre of attention or success. They are the ones who realize their greatness does not depend upon success in what they have or how they are regarded. Their measure is the greatness of the cause they serve, the horizon to which their life points. The least are those cooperate daily with God’s grace, recognizing their strength is little and the Lord is the one who makes it fruitful.” (Bishop Anthony Fisher OP, WYD2008)

Therefore, it is my will to truly put my trust and faith in Him – to be alert of his knocking. However, I found this to be particularly difficult because there are many distractions and temptations around me everyday. It is difficult to recognize the good from bad, or the best from the second best. Sometimes, the good thing is so tempting that it draws me away from what matters most. Very difficult indeed. It is even more difficult to not know when I am no longer staying on-course.

It is good also to remind myself of the verse, ‘Seek ye first the kingdom of God, and then all the rest of these good things will be given to you’. Perhaps, my focus should be on Him first then I will be clearer.

It’s pleasing to know that I am not be alone in this journey, and I never will.

let it go

I once read, when you are down to nothing, God is up to something. How do we know when God is up to something? How do we know if it’s God’s work?

Last Monday, I received a bad news from PPDK Selangau. My application for transfer was rejected. I got utterly frustrated. The only reason given was ‘Belum cukup tempoh’. To me, this excuse was rubbish. It simply showed how unwilling they are in dealing with transfer matter. Completely unprofessional. That day and the following days turned out to be horrible for me.

Friends and colleagues suggested me to go face-to-face with the PPDK’s boss. I saw that as a reasonable thing to do, so I took their advice and called him up the next morning, but was not successful. He was not in until Wednesday.

Not wanting to give up hopes and chances, I told myself to try again tomorrow. In my mind, I was determined to negotiate my issues and get my appeal approved. All I ever wanted was to win this and get out from here.

Somehow that evening, as I sat down feeling still a little depressed with the rejection, something unexpected happened. While many things and grudge were still running in my mind, something else tried to knock softly. This something was trying to ask me to sit still and calm down. I did exactly so.

When I was finally calm, I started to say a little prayer. Then I began to reevaluate the whole thing about getting transfer and the intention behind transferring.

New light started to shine upon me as I tore down my wall of stubbornness to see what’s really good for me. It brought me back to my first intention of leaving which is to leave as every one else is planning on moving. Has it not because of them leaving, I won’t even be thinking of getting transfer. To leave based on that is not right because I am only running away from my problem.

Every once in a while, new people come and go, and there’s good in everyone who has come and go. If I can change my mind to think like that, I can go anywhere and live comfortably with everyone and do good to them. It’s part of life that we meet new people and network with the olds.

Hence, I have decided to stay. Yet, there are other reasons why I am staying put which I am not going to pen here.

Though I stopped thinking of going for an appeal, I don’t like to think of myself giving up or not wanting to take chances. I think it goes beyond all those. This time I let it go.

I think sometimes, behind all my struggles and determined spirits to get everything I want, there is something more important God wants me to have. I might not have everything I want, I have everything I need. Though I may not have seen its full goodness yet, hopefully one day I will.

He is always knocking on the door of my heart, but many times, I am too stubborn and lazy to listen to him. This time I have made my decision. And I hope I did the right thing, and shall have no regret looking back on it next time.