Sehr langer Text, aber er erklärt sehr gut was bei/nach Lehman und AIG
tatsächlich passiert
ist.
------------
Abstract
The systemic risk posed by the default of
Lehman Brothers and the risks of
default in the cases of Bear Stearns and AIG focused government
efforts to
reform the financial regulatory framework on systemic risk. Yet there remains
substantial misunderstanding about the precise nature and source of this
systemic risk. For the
cases of AIG and Lehman Brothers, we outline what we
consider to be the core areas of systemic
risk. In the case of AIG, transactions
where the main motivation was to mute the economic impact of
regulatory capital
rules highlight how any regulatory scheme to reduce risk can lead to negative
unintended consequences: in this case a massive concentration of counterparty
risk. In the
case of Lehman Brothers, unintended consequences of the earlier
Bear Stearns bailout created moral
hazard as investors expected a similar
bailout, leading to unexpected concentrated risk in the
money markets. Such
events illustrate that even the most well-intended regulations and
interventions
can lead to negative unintended consequences, lessons critical to formulating the
regulatory structure of the future.
Introduction
Much of the regulatory response to
the credit crisis has focused on addressing
the problem of institutions that are “too big to
fail”. This response lies, for
example, at the heart of the March 26, 2009 Treasury announcement
outlining its
framework for regulatory reform. The first of its four broad components,
“comprehensive regulatory reform”, addresses systemic risk. The following quote
is taken from
the summary of this framework:
This crisis – and the cases of firms like Lehman Brothers and AIG
– has
made clear that certain large, interconnected firms and markets need to be
under a
more consistent and more conservative regulatory regime. It is not
enough to address the potential
insolvency of individual institutions – we
must also ensure the stability of the system itself.
In order to analyze the regulatory response to the issue of systemic risk, especially
as it manifests itself in the cases of Lehman Brothers and AIG, it is important to
have a
complete picture of the sources and causes of that systemic risk. In this
regard, especially in the
case of AIG, the lack of transparency surrounding the
circumstances that led to and necessitated
the government’s intervention has led to
a misunderstanding, or lack of understanding, of the
nature of the systemic risk
involved in justifying such a substantial claim on government
resources.
In the two sections below, some of the key sources of systemic risk in the cases
of Lehman Brothers and AIG are outlined. In both cases, key lessons for the
future regulatory and
intervention framework emerge.
The government bailout of Bear Stearns had some unintended
consequences
that led to the systemic risk that followed the Lehman Brothers bankruptcy. While
the interrelated nature of Lehman’s counterparty exposures are frequently
highlighted as the
source of this systemic risk, the settlement system for
derivative counterparty risk worked (not
without difficulty) to mitigate the risks of
the default from spreading through counterparties in
derivative transactions.
The systemic risk was actually due to the moral hazard engendered from
market
expectations of a Lehman bailout. Those expectations led to excessive
concentrations
of Lehman exposure in a large, independent money market fund
(the Reserve Fund) that, lacking the
resources of a deep-pocketed parent, led to
losses in money funds flowing to investors in what is
known as “breaking the
buck”, a decline in the US$1 net asset value of a money market fund.
Those losses undermined confidence in the money market leading to what can be
termed the “21st
Century run on the bank”, as investors quickly moved to
withdraw their cash from money market
funds. That lack of cash and, even more
importantly, confidence turned the initial spark of
Lehman’s losses into a systemic
event. The lesson we should take from the Lehman default should
be to highlight
the highly complex and unpredictable nature of market responses to government
interventions. Even the most well-intended of actions may have unintended
negative consequences.
In the case of AIG, credit default swap (CDS) contracts certainly lie at the heart of
the
systemic risk, and the majority response to this has been to focus on the
regulation of the CDS
market. However, this focus is misplaced for two reasons.
Firstly, the CDS contracts at the center
of the AIG risk are not the same type of
contracts that these regulations target. Indeed, proposals
looking to limit the CDS
market only to participants hedging direct economic exposure would not
have
prevented AIG from providing the CDS protection that led to its downfall.
Secondly,
while most of the focus has been on AIG, little attention has been paid
to the motivations of the
counterparties on the other side of its CDS. For AIG’s
counterparties, the purpose of the vast
majority of these contracts was to mute
the impact of regulatory capital rules for primarily
European financial institutions.
These “regulatory capital relief transactions” contributed to
the systemic risk links
that justified the US government intervention.
More coordination of
financial regulations between governments and regulators
will be required in order to avoid such
gaps in oversight. However, as the rampant
use of these transactions illustrates, even with such
oversight, regulation alone
cannot reduce systemic risk. Furthermore, these transactions should
cast light on
how a new regulatory regime should look at capital standards in the context of
concentrated counterparty risks.
The Systemic Risk of Lehman Brothers
The moral
hazard from the earlier bailout of Bear Sterns created the systemic risk
of Lehman Brothers. Here,
the unintended consequence of the earlier Bear
Stearns intervention created moral hazard, in that
market participants expected a
government bailout and, consequently, Lehman was able to maintain
its shortterm
commercial paper borrowings.
Due to the rising level of concern following
the problems in Bear Stearns Asset
Management in the summer of 2007, Bear Stearns gradually, but at
increasing
speed, lost access to the short-term money markets as a source for financing its
balance sheet. Repo lending represented an increasing proportion of Bear
Stearns’s financing.
From the investor’s point of view, the risk of lending to Bear
Stearns through a repo transaction
(which conceptually is equivalent to a
collateralized loan) decreases as the maturity of that loan
decreases. At the
extreme, an overnight repo represents the lowest risk form of repo lending for
the
investor (as their funds are returned the next day). Anecdotally, as Bear Stearns’s
reliance on repo financing increased, the maturity of its repos shortened. While
from the
investor’s point of view this reduces their risk to the default of Bear
Stearns, from Bear
Stearns’s perspective, this increases the risk of losing access
to funding. In the event that
concentrated maturities of repo financing refused to
roll over, Bear Stearns would face the
inability to fund its balance sheet and a
default. Such an outcome (a refusal to renew overnight
financing) appears
consistent with management statements earlier in the week leading up to default
that funding was secured, only by the end of the week to face a funding induced
default
event.
Concerns over Bear Stearns’s exposures to mortgage assets reduced its access
to funding from the money markets. Maturities are also likely to have collapsed
into overnight
lending in their commercial paper outstandings, though the
company continued to have access to the
commercial paper market, although this
was probably limited to overnight maturities as ratings on
the commercial paper
continued at the A1/P1 level right up to the failure. Ultimately, the refusal
of the
money markets to provide financing prompted the collapse of the firm. However,
according to Moody’s, Bear Stearns had just under US$5 billion in commercial
paper outstandings
as late as March 6. We will never know what might have
happened in the case of a Bear Stearns
default, but the events of Lehman
Brothers are clear.
The commercial paper outstandings
of Lehman Brothers rose in the quarters prior to its bankruptcy filing, with most of
the
increase occurring before the Bear Stearns bankruptcy. The overconcentration
of commercial paper
exposures in the Reserve Fund led to its
“breaking the buck”, prompting systemic panic in the
money markets.
Money fund investors responded to the “breaking
of the buck” issue
at the Reserve Fund by withdrawing funds from “prime” funds
and placing most of those proceeds
in Treasury or government-only money
market funds. This is the 21st century equivalent of a “bank
run”, and its
consequences contributed to the severe freezing-up of interbank lending in
September and October.
Prime funds are one of the main sources of funding to the banking
system. When
outflows sapped nearly a quarter of all funds overnight, money fund managers
had
no idea what the demands for withdrawals would be the subsequent day.
That led to a hoarding of
cash, which exacerbated the lack of funding for banks.
When banks became uncertain of receiving
funding from a source as major as the money funds, their willingness to provide
short-term
financing to one another also collapsed, further exacerbating the
squeeze on funding bank balance
sheets.
What might have occurred if there had been no intervention in the case of Bear
Stearns? The amount of Bear Stearns’s commercial paper outstanding
immediately preceding its
failure suggests that if it had defaulted, a scenario
similar to that which unfolded following the
default of Lehman Brothers may have
ensued if a large, independent money fund such as the Reserve
Fund had broken
the buck as a result of an outsized exposure. However, the support of Bear
Stearns appears to have unintentionally exacerbated the systemic risk of the
default of Lehman
Brothers, as short-term investors did not reduce their
exposures leading up to the default, despite
the steady erosion in Lehman’s stock
price and CDS spreads.
This leaves intact the
interpretation that the support of Bear Stearns postponed
systemic risk from its default, but that
this action unintentionally exacerbated the
systemic risk resulting from the default of Lehman
Brothers.
As a final note it is worth highlighting, in the context of the debate surrounding the
systemic risk contributions from the CDS market, that the systemic risk of
Lehman Brothers
was not a result of CDS settlements or exposures (for Lehman
Brothers both the counterparty and
reference entity settlements went smoothly, if
not without pain), but rather due to the losses in
the Reserve Fund, which
resulted in its “breaking the buck”.
The Systemic
Risk of AIG
Regulatory arbitrage transactions and structured credit products using the form of
the CDS contract, rather than CDS referencing corporate assets, stand as the
source of the
systemic risk of AIG. We highlight the fact that default for AIG would
have meant US$300 billion of
assets coming back primarily onto European bank
balance sheets, requiring a significant increase in
capital or a reduction in other
assets. Losses from AIG’s portfolio of CDS referencing CDOs would
have been
borne by multiple financial institutions with at the time unknown consequences for
financial stability.
Seventy percent of the US$446 billion insurance portfolio of AIG
Financial Products
provided insurance for regulatory capital relief. This provided relief
primarily to European financial institutions by effectively structuring the underlying
pool of
loans into a first-loss and second-loss piece. Capital requirements under
Basel I created an
incentive to effectively sell the second-loss piece to AIG, which
Basel II subsequently changed.
European bank exposure to AIG created systemic
risk since its failure would have brought the risk
back onto the balance sheet,
thereby triggering a significant requirement for additional capital.
To illustrate this, consider a sample European bank operating under Basel I at the
time
with a US$1 billion loan portfolio on its balance sheet. Because
risk weights were a flat 100%
regardless of ratings, the regulatory capital
requirement for the bank holding this portfolio was
US$80 million (8% of US$1
billion). Next, consider a securitization of the original loan portfolio
into a special
purpose vehicle with a US$960 million senior tranche transferred to a third party
(AIG) and a US$40 million junior (first-loss) tranche retained by the bank. Now the
capital
charge is only US$3.2 million (8% of US$40 million). This hypothetical
example illustrates the
spirit of regulatory capital arbitrage under Basel I.
Basel II reduced this regulatory
capital arbitrage by explicitly recognizing the
higher credit risk in lower-rated tranches.
Despite the larger notional amounts in AIG’s CDS portfolio that were exposed to
regulatory capital relief transactions, the losses to date have been much greater in the
“arbitrage”
transactions. Of course, this is due to the fact that “multi-sector CDOs”
refers to
the business of insuring against loss in subprime mortgages. The fundamental
flaw
in that underwriting led to expectations of loss far lower than those ultimately
realized. Hence,
loss recognition on the multi-sector CDOs portfolio alone brought
about the fall of AIG.
However, whether the collateralized loan obligation (CLO) category of arbitrage
transactions will
show accelerating losses remains uncertain. The mark-to-market
valuations in corporate debt to date
mainly reflect the substantial mark-to-market losses in the leveraged loan space and declines in AAA CLO
prices. Loan losses
underlying regulatory capital relief transactions, however, are not likely to
grow to
such a degree as to put the super senior exposures at risk, especially over the
relatively short period of time left on these contracts (at the time of writing,
average maturity
stood at about a year for loans and residential mortgages).
However, part of the systemic
risk of AIG did lie in these larger notional
exposures of regulatory capital relief transactions.
Had AIG failed as a result of its
smaller, but higher loss-generating, “arbitrage”
transactions, loan exposures
equal to the notional amounts under these regulatory capital relief
transactions
would have come back primarily onto European bank balance sheets. During a
time
of rising credit losses and constrained capital, that unexpected surge in loan
growth would have
further constrained the capital and lending capacity of
European banks.
AIG
Counterparties Revealed
Under pressure for transparency following the government bailout, in March,
AIG
revealed top counterparties benefiting indirectly from the government intervention.
Conceptually, the bailout of AIG for systemic risk purposes means supporting the
entire financial
system. In this case, since AIG provided “insurance” on losses
that under a default it would
not have been able to provide, the benefit of the
government bailout of AIG accrued to the
insurance holders – more precisely the
counterparties to AIGs credit default swap contracts.
AIG Financial Products and Collateral Postings
AIG, through its financial products
subsidiary AIGFP provided effectively
“insurance” on losses on primarily super senior CDOs
(Collateralized Debt
Obligations) referencing primarily sub-prime mortgages. For the purchasers of
this insurance, the risk of holding these securities on their balance sheet was
effectively
swapped for the counterparty risk of AIG – its ability to pay on any
losses the securities might
realize.
However, since the counterparties faced not only risks of ultimate losses, but also
of mark to market losses (given mark to market accounting requirements), they
needed a form
of insurance that mitigated those mark to market risks as well. The
CDS contract provided that form
of insurance, effectively shifting that mark to
market loss to AIG through “collateral” posting
arrangements. Here, the obligation
of one counterparty to pay another is recognized through daily
“mark to market”
valuations. These valuations reflecting the anticipated or potential losses
(based
on market pricing) on the instrument “insured” created the obligation of AIG to
make collateral payments to its counterparties.
AIGs requirement to make these substantial
collateral payments stemmed from
two sources. First, the plunging value of the securities insured
created huge
“mark to market” losses. Second, the deteriorating counterparty credit condition
of
AIG based on the growing liability from these losses led to credit rating
downgrades.
Those downgrades in turn led to even greater collateral posting
requirements.
Those
collateral payments effectively transferred the mark to market risk to AIG. If
AIG based its
exposures on its estimates of ultimate loss realization, the risk it
faced was in reality the mark
to market risk of the securities. However, since
some collateral posting requirements only kicked
in after a downgrade, it is
possible that both AIG and its counterparties, viewing this likelihood
as low,
assumed that the mark to market risk issue for AIG (and hence the counterparty
risk
each counterparty to AIG faced) was correspondingly low. In hindsight, the
collateral posting
requirements created a “springing” mark to market risk for which
AIG had not sufficient
liquidity. That event necessitated the government
intervention.
What is important to
note about these collateral posting amounts, is that they do
not represent the ultimate losses on
the underlying securities. Rather, they
represent the “mark to market” losses. To the extent
the market prices provide a
good indicator of expected loss, then these “price” losses to date
are likely to be
the ones ultimately realized. While there is much debate around the role of mark
to market losses, in this case given the realized losses in the underlying subprime
mortgage
loans, it appears that these mark to market losses have accurately
anticipated the ultimate
realized losses for subprime mortgages. But, at the time it was (and is) difficult to separate from price
declines those due to “illiquidity” or
“risk premia” and those due to ultimately realized
losses. Beyond the size of
losses the government (and taxpayers) will ultimately face stands the
question of
whether the government should have required some “haircut” from the
counterparties, an important debate for another forum.
Counterparty Risk Beyond CDOs: GIA
and Securities Lending
Finally, there are the other areas of systemic risk from an AIG default. Our
original section above highlighted the role of the regulatory capital relief
transactions.
These and the CDO losses represented the largest areas of
systemic risk of AIG. For the CDO losses,
had AIG failed, those losses would
have flowed to the counterparties, and unlike the risk of the
regulatory capital
relief transactions we highlighted, these losses likely would have been realized
in
a direct hit to capital further undermining the solvency of the financial system.
That
makes those losses clearly the largest source of systemic risk from AIG.
Later releases from AIG
highlighted other segments of the financial markets that
also would have been affected: Guaranteed
Investment Agreements and
Securities Lending Payments.
Under a guaranteed investment
agreement, AIG agreed to provide a promised
yield and return of principal according to
predetermined terms. Counterparties
viewed these investments similarly to cash, relying on the then
AA rating of AIG.
To support that rating, collateral posting would be required if AIGs rating fell
below that AA level. Hence the $12.10bn in collateral posting required from these
lines of
business as AIG lost its AA rating on September 15, 2008.
In securities lending, AIG borrowed
against the securities held in its insurance
portfolios. It could then reinvest the cash received
at a higher investment rate
then it paid out on the secured borrowings thereby earning spread and
leveraging
its portfolio. Securities lending however entailed risk - the mismatch between
asset (typically longer dated and higher yielding) and liability (the shorter dated
securities
lending program). In the event that the counterparties would not roll
over the provided financing,
AIG would have to liquidate its asset portfolio to pay
back those amounts. The $43.7bn in payments
represents the amount paid back
to lenders to AIG under this program.
Conclusions, One
Year Later
One year later, the sources of systemic risks posed by AIG prompting the
government bailout are clearer. The total cost however remains to be seen,
though likely far
below the total amount of support extended. Outside of the CDO
losses, much of the support provided
ensured liquidity rather than credit risk and
the assets backing up those loans likely have a much
lower realization of losses
than those in the Maiden Lane III portfolio of CDO exposures. Updating
from our
original piece documenting the role of capital relief transactions, future capital
regimes need to contemplate market responses to regulatory capital rules. And
the scope of AIGs
activities highlight that the future size of credit exposure to
counterparties despite rating
agency designations (AAA or otherwise) need
greater consideration of the risk, however small of a
catastrophic loss, and how
“springing” collateral posting requirements exacerbate rather than
limit
counterparty risk.
endlich:LEHMANN DEAL scheint gescheitert zu sein....... 
Warren Buffett(3546)
hallodu_st(9)
iceman(28)
...es geht mM um Folgendes,...die
wissen ganz genau dass da noch ein paar Kandidaten warten und darum heissts njet.
