SK: Except, in this instance, that is not how collateral works. In this instance, Goldman was well within their rights to step in and seize the collateral and not have to wait in line. The point is somewhat nuanced, but we’re not dealing with “secured” and “collateral” in the commercially accepted sense of the words. Again, while I’m not a fan of Goldman, I understand how this particular counterparty arrangement works and they would have been (legally) able to step and assert their ownership, regardless of where AIG was on the BK continuum.
UCGal: I haven’t read Lincoln’s proposition, but I’m generally supportive of more and better regulation of derivative products, including CDOs, CDSs, CMOs and all the rest of these very arcane financial instruments.
I have a solid background in corporate finance and accounting and understanding the ins and outs of many of these products is extremely difficult even with my background.
I don’t know if you followed the AIG debacle at all, but the government agency responsible for keeping an eye on AIG was OTS (Office of Thrift Supervision). To say that this agency was a really, REALLY poor choice is to understate it magnificently. Moreoever, during Congressional hearings on AIG, the government itself was unsure as to what agency had oversight and enforcement responsbilities (see NPR article on same: http://www.npr.org/templates/story/story.php?storyId=104979546).
Speaking of derivatives and understanding them: If you have some time and feel like overtaxing your brain cells, read “Traders, Guns and Money” by Das. This is one of the best books on derivatives out there and by a master of the products.
