What’s it like, the laborious job of “unwinding” hundreds of thousands of mind-numbingly complex derivatives contracts amassed over the years by the inimitable AIG Financial Products? Ask the Wall Street investment banks to whom they’ve been farming out the work — it’s so painful and time-consuming it feels like the old days, especially the “massively profitable” part. An anonymous derivatives trader tells the blog Zero Hedge:
During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds.The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades - ever”.Sort of undermines the notion that AIGFP employees needed retention bonuses so that the Great Unwinding might be an “orderly” and modest process conducted by cool heads and not, god forbid, subject to raids from ex-AIGers who’d left to trade against the company’s book. Nah, they pretty much “threw in the towel,” as Zero Hedge points out, and gave the “winners” on all those bad trades a chance to really earn their bonuses again.
But is the big payout the real shadowy force behind the recent runup in stock prices? Today’s stock traders seem worried. Because even if reports that AIG FP has only unwound a quarter of its total trades are true, most investors agree the Treasury is too cash-strapped to do this forever.
We’ll know a little more next month, when the banks announce their first quarter earnings numbers, which they’ve been “whispering” excitedly about for weeks. Goldman Sachs’ purported “whisper” number has the bank pulling in $12 billion in revenue this quarter, a pretty sweet improvement from the $3.68 billion it pulled in during the fourth quarter of last year — largely on the strength of its bond trading desks.
There are other good reasons the banks are reporting profits this quarter — they’re borrowing money from the government at a steep discount to their usual costs, for one, and if congress votes to ease accounting restrictions the usual “financial engineering” will be an even stronger factor. But as queens of corporate welfare go, the AIG bailout will be tough to unseat; and we’ll find out before long just how cronyistic and unjust a queen she was.