It would be interesting to know what percent of the AIG "loss" is attributed to the "naked CDS" contracts, the ones where the buyers of insurance where speculators with no real exposure to the CDS reference debt? In another words, how much of its "loss" is simply a gambling paper "loss" due to their contractual obligation to pay the CDS speculators their gambling "wins"?
Surely such "losses" are of no concern to the real economy, nor could they represent a crisis of confidence in anything but the CDS market itself. If so, and to make this fact transparent, the first step is to separate economically justified CDS contracts ("covered CDS"), the ones where buyer of insurance has actual exposure to the reference debt, from the ones that are pure gambling contracts ("naked CDS"). The next step is for the government to declare all the "naked CDS" contracts canceled, the market for them *shut down* immediately. This would eliminate trillions of dollars in leverage that is "at risk", and would be first step towards stabilization of the global financial system and restoring confidence. The cost would minimal to the taxpayer, because the maximal amount of compensation for canceling the "naked CDS" contracts will be the amount of premiums payed by the buyers. This is is likely to be in hundreds of millions, but nothing compared to trillions (this is the beauty of leverage). If the government would do this rather then having AIG or banks go bankrupt or bailout due to their inability to meet the "naked CDS" margin requirements, the only causality would be the market for "naked CDS" itself, the market which should never existed unregulated in the first place.
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