That money is going somewhere, Forest. It simply doesn't "disappear". Its not surprising then so many traders reject Creative Destruction. They don't even contemplate its real!
As I stated in my previous post, the counter party was paid in the past. He (or she) already booked the gain or loss. The capital can "vanish" because you are servicing a debt on an asset that is decreasing in value. This is exactly the problem in the real estate market. Homes are declining in value. Yet homeowners are servicing debt on assets that are declining in value.
Let me spell it out for you (you're clearly not someone who answers to your own description)... Let's say AIG has insured a tranche held by, say, RBS. All of a sudden this tranche stops paying the cashflows and this causes AIG to pay a lump sum to RBS. Lather, rinse, repeat and, as we all know, AIG sold a lot of insurance on all sorts of nasty stuff. Now, let's say AIG paid RBS $10bn for that failed tranche. Guess what happened to that? Hint, just look at the RBS stock price. Here's what you can do as a good exercise. Look at how much of Fed's money has been tapped, on the one hand, and the total reduction in the capitalization of the financials. Let me repeat, it ain't hard and it ain't very sophisticated math either, for 'a thinking person with a half-a-nut rolling around'
Wrong, Grasshopper. Capital does not vanish because there was none to begin with. The appropriate term here is debt. And debt remains static despite the value of the underlying asset. In the case of real estate, there was only implied equity based on projected value. That does not equate to capital, in any sense of the term. Capital is destroyed when a currency goes to zero, or bankruptcy is declared, thus wiping the obligation to pay. But let's assume you're right for a minute. That capital "vanishes" because the underlying looses its value. So where does that disappearing capital go? Is it destroyed? Does it vanish into a poof of smoke at some magicians show??? No, that "Capital" gets paid to the counter-party who holds the other end of the mortgage. Whether Sally Six-Jack Pack or Joe Soccer Mom locked in for a 30-year at 600K - that is now only worth 100K - they still gotta make payments at 600K. And where do those payments go??? To the counter-party of the mortgage contract. In this case, a collateralized debt obligation held by a bank or investment fund, who receives those very much real cash money payments from the suckers who bought in a bubble top. For every buyer there is a seller.
Not everyone can lose, Corky. Seems you get you're head around it. If the FED back-stopped every single piece of toxic paper, stock prices would be holding their values much better. Wouldn't they? Taking one example and drawing a corollary (stock price) from a corollary (how much of XYZ Corps assets were insured by AIG), is stupid. We're talking statements of fact. Not playing guessing games with anecdotal, piecemeal observations that suggest lots of things but prove nothing at all! If RBS earns 10 Billion in CDS payout, that would show in their statements. Yes or no, Corky? Its a simple question. Where is it? Show me the money. Or are you gonna tell me they "lost" to UBS? Who "lost" it to Northern Rock?? LOL <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/MJJN9qwhkkE&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/MJJN9qwhkkE&hl=en&fs=1" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>
I'll attempt to rebut you later. Bedtime. btw, slashdot has a great thread on the wired article "The Secret Formula that Destroyed Wall Street". http://news.slashdot.org/article.pl?sid=09/03/03/036223&from=rss
FED hasn't back-stopped everything, obviously. If you're holding stuff that's junior in the capital structure, like equities, Fed (unlike the BoJ, which is, possibly why Nikkei is doing better) won't help. What a silly thing to say... Why is it stupid, pray tell? What is rather sub-par is your inability to follow a perfectly simple line of reasoning. Let me spell it out for you in very simple terms. You asked where the AIG money has gone. It went into the revenue line of the counterparty financial institutions that then used this income to offset various writedowns they had to make and margins they had to post on the other parts of their portfolios, such as leveraged loans, CMBS etc. Now we're talking... Statements of fact is what I like and I am going to exhibit some goodwill here. To 'show you the money', you're gonna have to show me the money first. My banking analyst's time is rather expensive, but she owes me some favors, which means that I can give you a discount. Let's say it will take us an hour or two to go through some income/cashflow statements and put something together for you. Shall we discuss a 'factual' fee? Another thing I might add - sort of tangential to the entertaining discussion we're having - is that in another post I mentioned that some of the most recent AIG losses came from the writedowns of goodwill and tax credits, i.e. it's money that was never there in the first place.