Warum gibt es etwas und nicht nichts? (Why is there something rather than nothing?) - Leibniz

Thursday, July 03, 2008

Credit default insurance and murky dealings

You have to have car insurance, it's a legal requirement. So it occurred to me a long time ago that you could make some money selling very low-cost car insurance that (when you looked at the fine print) promised nothing, thus making a safe profit for the company, fooling the regulators and satisfying the cheapskate customer, all at the same time. Fine, till the regulators find out.

According to Karl Denninger today, this is exactly what's happened in the case of UBS insuring one of its mortgage debt packages against default losses. The insurer, it's alleged, has totally inadequate capital for the insurance it's undertaken, but the insurance suited UBS because it permitted the stinking package to be left off the balance sheet.

Oh, to be a lawyer now.


Lord James Bigglesworth said...

You have to have car insurance, it's a legal requirement.

Only if you have a car, Sackers.:)

I don't.


That saves you about £3,000 a year net for a start!

Ryan said...

Ah yes, this was a clever trick. Taking "junk bonds", sticking some "insurance" on top and then selling them as investment grade bonds. It's OK to insure one bond this way, but what if there is systemic failure of the financial system? Not all the cars crash at the same time - but all the banks can crash at the same time.

They say this is why Bear Stearns had to be saved in this dodgy buy-out with not a word to the shareholders. If the books were opened then everyone would know that junk bonds were being sold as AAA rated but were having to be re-priced as junk bonds. Nasty. Very nasty. Like buying a shedload of Rembrandt paintings as an investment and then finding out every one of them is a fake...

Amma said...

Great work.

Sackerson said...

Thanks, Amma! Unless you meant the idea about car insurance?