A portfolio of 45,000 auto loans originated in 2007 by BMW Financial Services and subsequently charged off by the captive was sold this week.
The price was not disclosed.
The portfolio, which was sold by Collection Services Inc., a brokerage firm, had loans originated nationwide and was scrubbed for inaccurate informations within 14 days of the sale.
I disagree with the logic that you guys are using but at the end of the day your result is valid. AIG CDS exposure decreases from roughly $400 billion to $200 billion. Assuming that AIG capital is unchanged, its leverage decreases by half (exposure to capital), which is really what you want. What I would suggest is an FDIC-like program for insurance companies that sell insurance (credit default swaps) to federally regulated financial institutions. The FDIC requires banks to maintain a capital balance sufficient to cover roughly 99% or more of the possible risk scenarios out there. The FDIC is in second loss position and it covers the remaining 1% of really bad scenarios that blow through the bank’s capital and leave the FDIC at risk. The problem with insurance companies such as AIG is that the rating agencies do this risk analysis. Now we see the problem. If it turns out that capital is insufficient at the rated institution then the rating agency says “My bad!” and walks away. It is not at risk so its rating can be bought for a price. If things go well I collect my fee. If things go bad I walk away. If the FDIC stepped in and replaced the rating agency then we can expect that the now federally insured institution will maintain sufficient capital to cover its risk because the FDIC is at risk and will cover losses that exceed the insured institutions capital balance. The result of this will be less leverage, which is the result that you guys are going for.
Does the FDIC really need to step in? It does because as we have seen, the federal government does in effect insure these institutions (i.e. when the insurance company capital is insufficient to cover losses then the government steps in to dump capital into the company). If the government “substance over form” does insure these companies then the government should regulate them in a manner very similar to the way the government regulates banks.
My two cents.