Global Bankers Propose A New AIG To Erase Their Mistakes

Remember AIG? It used to be a AAA-rated American-based global insurance company.  They sold, among other things, life insurance using actuarial strategies that assume that it is unlikely that many of their insured die at the same time.  AIG was a profitable and solid company until they had the brilliant idea of insuring bonds.  Bonds, they said, are just another kind of risk which we could insure using the same principles.  So they sold insurance against default on billions of bonds and made a lot of money collecting premia, until the bonds began to default.  At that time, the company was wiped out and would have disappeared had it not been for the intervention of the NY Fed, under Tim Geithner, who basically paid all claims against AIG in full.

Fast forward to 2011, the European banks and insurers are up to their eye-balls on European sub-prime, aka PIIGS' bonds, and are looking for a way to pass the bill to their governments without taking any losses that may jeopardize their bonuses.  Enter, Allianz, a respected German insurer with access to the government (just like AIG ).  Allianz has proposed to turn the EFSF into a pan-European AIG.  This time, however, to save the annoying step of going to the central bank, directly with public money.  Thus, the EFSF would insure the bankers against default so that they can continue to do their patriotic duty of buying high yielding Greek bonds without fear of loss.  The high yield, naturally, they get to keep as earnings.

Could this work?

It all depends on who you are.  It may work for the banks as they will live to fight another day and continue to pay themselves in the meantime.  Greece et al, will continue to service enormous amounts of debt while remaining uncompetitive for the foreseeable future. 

Europe? funny you should ask.  The stronger credits in Europe will assume de-facto the liabilities of anyone insured by the EFSF.  The liabilities, as it is usually the case in financial engineering will NOT show up anywhere, so the unsuspecting public will not see them until, one day, they become due...like AIG.