DUSTOFF 26

During the early days of Vietnam there was a certain HUEY pilot whose call sign was DUSTOFF 26. He flew Med Evac and as there weren't a lot of troops committed at the time, his call sign was often heard whenever an evacuation was needed. Over the course of the war, the call sign stuck; every med evac flight became know as a DUSTOFF. They saved a lot of guys at considerable cost to themselves so I thought from here on out, our Fed Chairman will no longer be known as Helicopter Ben but in honor of those brave guys we shall call him DUSTOFF.

DUSTOFF showed up on the Hill today in front of Barney and the boys. Yak Yak, Blah Blah. Things better but not great no change coming. Really a non-event. Hardly any talk about the governing legislation for the financial industry that is swirling about both the Senate and the House. I thought for sure one of those geniuses was going to ask him about derivatives in light of Arthur,Arthur's article of the other day (thank you Paul, for pointing out that Arthur, Arthur is conflicted seven ways to Sunday) but it never happened. Thank heavens for small favors

Anyway, to continue from our conclusion on Monday, there remains still a good deal of confusion as to the role derivatives played in the crisis primarily, I think, because the term is being used in connection with what happened with AIG with the focus being almost entirely on AIG. I suppose one could say that the instruments created by AIG which are the focus of all the conversation are technically derivatives but in fact they are really somewhat esoteric insurance policies not unlike, in their purpose, forms of guarantees that have been used by financiers since some Medici back in 14-something wrote a guarantee or a special purpose letter of credit in favor of Da Vinci completing some work for a buddy in Firenze. They have been around for years. Of course the quants on the street had to get fancy and support the creation of the same with all sorts of formulae to explain the risk profile allowing other quants to price the damn things so that a market could be made in them forgetting, of course, that none of this brain power was worth a crap if nobody wanted to buy them which, in the terms of the market is stated there being no bid. But, before these things got sliced and diced it was a series of fairly straightforward transactions between risk-takers and hedgers of risk with a finite number involved. No method of transparency would have improved upon the situation. Please keep in mind that underneath all of the underwriting done by AIG there should have been an asset: in other words if one were to call on the guarantee that which was the object of the guarantee would have to be delivered--sort of a "no tickee, no washee," as we used to say in the good old days before PC. But AIG, MBIA and the other geniuses who wrote this stuff were so sure of their math that they allowed their contracts to include the ability of the purchasers to require additional collateral if either the perceived credit of the underlying risk or its guarantor deteriorated. In short, they screwed themselves. And now, Houston, we had a problem. Irrespective of ownership of the underlying assets the guarantors were now required to pay up to the counterparties without an off-setting return of the guaranteed assets. With all respect to Arthur, Arthur, the problem was not transparency but plain ol' stupidity on the part of the underwriters. Hubris kills you every time in the end. That's not to say exchanges aren't a good idea; it's not to say more transparency is bad but it is to say that if you are arrogant and stupid and get into a business you know little about while suffering from all of the above you will probably get killed despite being as transparent as you can be. I'm all for improvement but let's first understand what happened and why before we go racing out to solve the unsolvable. Bold statement: This was a failure of market understanding and of management. We will never know but if the board of AIG had not been cowed by the dreadful Spitzer and fired Hank Greenberg this would not have happened. Government intrusion into business for the purpose of personal political gain. This is the result.