Yesterday I watched the 2011 movie The Last Hours Of Bear Stearns on Prime. This was my first viewing of it. It was worth watching.
The only new information was what I had already suspected but never heard anyone say out loud. They said it in this documentary. AIG was a tack-on bail out because it was too huge to fail. If AIG collapsed all of the banks would also fail. So the government bailed them out.
After all that was done, the banks are all still insolvent. All the banks are counting on derivatives to make them look solvent initially on paper; but they are still insolvent.
So what did I learn about AIG that I had only suspected? They were bailed out because they sold a great deal of derivatives backstopping the banks if any of them went bankrupt. AIG was the giant web that kept them all supported in the air.
So just how insolvent are the big banks now? Today I saw this article posted: After Steamrolling Credit Suisse AT1 Investors, UBS Is Selling CoCo Bonds Of Its Own. In case you don’t know it, a COCO Bond is:
A contingent convertible bond (CoCo) is a fixed-income instrument that is convertible into equity or stock if a pre-specified trigger event occurs. CoCos are primarily issued by European financial institutions and have a specific strike price that, once breached, allows the conversion of the bond into equity or stock.
1 CoCos are high-yield, high-risk products and have complex features and unique risk considerations that differentiate them from traditional convertible, preferred, or debt securities.
2 They sit right above common equity within the bank's capital structure and have a contractual trigger level linked to an issuer's capital adequacy ratio.
3 CoCos can be redeemed if a bank exercises an option to do so, typically after a five-year period, but regulators may block banks from redeeming them if the cost of issuing replacement debt is much higher. Source
To restate all the above financial jargon, a COCO is a bet with the devil and only an entity in dire straits would enter such a deal. As I recall, UBS is the largest bank in Europe.
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