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tony

Veteran Investor Says Enough To Wall Street

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Tony --

I agree -- he is one of the real and genuine heroes in our world today. This book sounds great, and our kids and nieces and nephews will all be getting copies for holiday gifts... Find the free shipping from Amazon!!

 

JudyS

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Tony --

I agree -- he is one of the real and genuine heroes in our world today. This book sounds great, and our kids and nieces and nephews will all be getting copies for holiday gifts... Find the free shipping from Amazon!!

 

JudyS

 

 

To quote a line in an otherwise forgetable flick ("The Mexican") delivered by an actor who became a household name in a hit HBO series to an actress who was otherwise famous for her role as a "Pretty W*o*m*a*n":

 

"When do you know enough is enough?"

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If only we could clone John Bogle. What a great man. This article may be old news for some but the article just came out.

 

 

Tony, ..........yes old news..........but current in every environment............Mr. JOHN Bogle is a hero, and has done more for the small investor than anyone that I can think of,,,,,,,,,,,,,,,,

 

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Intruder --

 

The book "Enough" was developed following a conversation that Bogle became aware of.... and his book answers the age-old questions, what is enough and how do you know it when you see it. You should be able to find this tome in a library near you quite soon.

 

JudyS

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Hi Steve, As far as AIG is concerned, I believe that this is a financial decision based on need to be negotiated. I personally do not have the slightest idea of how much AIG needs. That said, with all the extra fees that AIG had and are charging, it's hard for me to understand that they need one penny more; I wonder where all that money went.

 

 

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Hi Steve, As far as AIG is concerned, I believe that this is a financial decision based on need to be negotiated. I personally do not have the slightest idea of how much AIG needs. That said, with all the extra fees that AIG had and are charging, it's hard for me to understand that they need one penny more; I wonder where all that money went.

 

Duh to Goldman Sachs, Merrill Lynch and other financial institutions in "collateral calls" when bonds issued by banks that AIG had guaranteed against default began to decline in value. Under the tems of contracts (swaps) AIG was required to give its trading partners such as GS collateral such as cash or T-Bills equal to the value of the decline in the bonds that AIG had guaranteed against default. ( In the real world its known as insurance but in financial transactions its called a "credit default swap" for which no financial reserves had to be established to cover lossses.) According to the WSJ (11/3) AIG has been required to post about $50B in collateral to make good its obligations to GS and other trading partners.

 

AIG mistakenly thought that it could collect fees for guaranteeing the debt obligations of banks against default without having to risk any of its capital $ because the bonds would not decline in value. AIGs guaranteed credit default swaps was calculated at about $440B.

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Hi Ira, Intruder and Scotty:

 

Ira: since you understand Intruder's post, can explain in plain English 25 words or less what Intruder said?

 

Here are some questions that might help break it down for all of you:

AIG has been in the insurance business for many decades. What happened this time that they had to get govt. help to cover their loses?

 

Are "collateral calls" similar to margin calls? When you borrowed money from your stock portfolio and the stock decline in value, the brokerage firm issues a margin call, selling your holdings to cover loses. Any similarities? Only in this situation, AIG had no assets to sell, right?

 

Credit default swap:

How can this be called insurance in the real world when in the financial world there is no financial reserves to cover loses? I would hope the any car or house insurance company has reserves to cover loses! Thus, the collateral calls required financial reserves, so AIG went to the feds, right? If so, in their business plan, I would think that AIG would have a scenario that would take into account if something went wrong. Obviously, they took huge risks.

 

Does GS and ML pay premiums to AIG to have this insurance? If so are they still paying premiums?

 

If the bonds did not decline, there would be no problem, right?

What was the cause of the bonds to decline in value?

 

Define the risk that GS and ML were taking on that required this insurance from AIG? Define the risk that AIG was taking on to "insure" GS and ML bond holdings? Credit risk, interest rate risk? Just plain recklessness?

 

Considering the massive loses that AIG has, what does that say about the human side: culture, character, financial philosophy of the people in AIG who made these decisions?

 

As far as the average investor is concerned, one really does not need to know about this stuff. However, since this mess has caused a major and potentially disastrous (may get more ugly) in the financial markets as a whole that directly effected our 403bs, 401ks and other investments worldwide, I think its time we learn about this so that we can protect our nesteggs.

 

I believe that it validates what we have been saying around here for years; keep one's investment portfolio SIMPLE by investing in the total economies via total stock market index and the total bond market index, international stock and bond market indices, allocate the bond/equity according to your age.

 

I realize that these are a lot of questions and I and others I think would appreciate some answers in plain English so that we might use this information to understand the big picture and for our planning purposes.

 

Thanks so much,

Steve

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Steve;

 

For the answers you need to read the 11/3 WSJ article on AIG's failure to take into account the risk of collateral calls and the decline in value of the underlying bonds that were guaranteed.

 

There is a similar article on ML's failure to understand the risks associated with the $Bs of mortgage backed securites that it purchased which appears on P1 of the 11/9 NYT business section.

 

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Intruder,

I will read that article you suggested and others too. But I think it would be helpful to answer my questions for all to see, not just me.

Steve

 

If you read the articles you will find the answers to your questions.

 

The WSJ article answers your question about credit default swaps not being subject to a requirement to have reserves because they were treated as a financial products, not insurance even though under the tems of the swaps contracts AIG promised to make payments to their counter parties (GS) if certain contingent events causing a loss occurred.

 

As for the premiums charged by AIG the WSJ article states "AIG charged its trading partners a fraction of a penny for every dollar of credit protection."

 

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