Credit risk management of CDSs, case from AIG Essay

Credit risk management of CDSs, case from AIG - Essay Example In regard to the bailout, AIG was presented with access to a $85 billion credit facility. In exchange, the United States government was presented with warrants for a 79.9% equity stake in AIG and the power to expel dividend payments to shareholders. AIG’s misfortunes started in a unit known as AIG Financial Products, which traded in credit default swap (CDS). A CDS acts as a safeguard against a default on assets that are connected to corporate debt and mortgage securities. The losses to AIG’s portfolio of CDSs were prompted by the disintegration of the subprime mortgage1 market. A groundbreaking amount of defaults by subprime borrowers with adjustable rate mortgages initiated the current catastrophe in the global financial markets in 2008. Most of these began in 2005 and 2006 when lenders remarkably loosened up on underwriting standards. Figure 4.2: Subprime mortgage originations Source: Bradford (2008) ‘The Subprime Mortgage Meltdown, the Global CreditCrisis and the D&O Market.’ Advisen : Productivity&insight for insurance professionals. The assumption was that homeowners would refinance prior to the monthly payments being readjusted, but decreasing real estate prices made it inaccessible for the majority of subprime borrowers who had hardly any or no equity in their houses to refinance. As they were incapable of paying the increased monthly payments, many borrowers had no choice but to default. Defaults in U.S. mortgages rose beyond record levels in the second quarter of 2007, and the fallout rapidly expanded all through the financial markets. The subprime mortgage debacle immediately brought forth the worldwide credit crisis. AIG is one of the financial institutions with credit default swaps business that was also affected during these circumstances. From then on, many CDSs were sold as insurance to cover those exotic financial instruments that created and spread the subprime housing crisis. As those mortgage-backed securities2 and collateralized debt obligations3 became more or less valueless, abruptly that reputedly low risk event saw an actual bond default occurring on a daily basis. AIG sold CDSs were no longer taking in free cash. It had to pay out a large amount of money. The crisis at AIG is a â€Å"question of liquidity, not of capital†, according to ROB Schimek, EVP and CFO of AIG Property Casualty Group. Despite the fact that there have been a small amount of losses paid under the CDSs, contract provisions demand of AIG to post collateral in cash if the value of the assets underlying a CDS declines. At the parent level, AIG has approximately $80 billion in shareholder equity, though the majority of that is secured in the company’s insurance operations and cannot be converted to meet the collateral calls of the financial products unit. Since it did not have enough cash to meet the collateral demands, the company faced a liquidity crisis and bankruptcy protection. 4.3 What AIG actual did leaded the company go down 4.3.1 The undoing of AIG liquidity crisis AIG reported â€Å"an unrealized market valuation loss of $11.5 billion on [the] super senior credit default swap (CDS) portfolio† held by its subsidiary, AIG Financial Products in the annual report for 2007. The definition of CDSs was discussed in chapter 2.2. This initiated a drastic downfall and ended AIG’

Suggesting Violent Computer Games are Morally Wrong Essay

Suggesting Violent Computer Games are Morally Wrong - Essay Example This paper shall analyse moral arguments on whether or not playing violent games are morally wrong. It will mostly consider the argument that playing violent video games are not morally wrong and various moral theorists shall be considered in order to support this position. Body Violent computer games have increased in type and number in recent years. Coupled with the increase of sales in home computers, more people seem to be engaged in these types of games. Violent video games have also been made more graphic in their portrayals of violence (McCormick, 2001). The features of these games also include screams from victims, recoil from gun shooting, writhing victims, blood splatter from victims, as well as flying and severed body parts. The players also have options in terms of weapons to use including grenades, machine guns, flame throwers, rail guns, sniper rifles, and similar weapons (McCormick, 2001). As more improvements in gaming have been introduced in recent years, the clamour for further improvements seems to be detected from the gamers. And the gaming companies are ready to comply with these demands. With these gaming activities, concerns have been forwarded on the fact that violence in video games seem to be desensitizing the gamers to violence and death, possibly making it easier for them to commit acts of violence in the future (McCormick, 2001). It is easy enough to understand these views especially with the actual reports involving children and adolescents who are re-enacting or testing what they have been playing in their video games (Dill, 1998). On the other hand, others argue that the act of playing a game, even if it is very realistic is not immoral because in the first place, the game is far from real. What matters in the end are the real actions of real humans in the real world (McCormick, 2001). Acting violent in a video game is not equivalent to actually acting violent in real life. The simulation of acts which represent morally objection able activities is not per se a morally objectionable activity because giving moral credit in such a way would be tantamount to giving moral credit or passing judgment over an actor playing a murderous role in a movie (McCormick, 2001). Based on these considerations, the issue on whether or not playing video games is morally objectionable is now a valid moral consideration. There are various ways to evaluate the issue. One way would be through the utilitarianism moral theory. The utilitarian theory highlights the fact that people object to video games because of its consequences and because these video games seem to contribute to the tragic outcomes seen in school shootings or violent altercations among adolescents (Durkin and Lowe, 1998). Under normal conditions, playing video games is not a dangerous act on its own. Based on Bentham’s utilitarianism, acts are good so long as they ensure benefits to people, and they are bad to the extent that they cause harm to other people (Mill, 1998). Based on these general ideas, utilitarianism may argue that violent video games are morally unacceptable because they increase the risk for harm. However, this increased risk of harm cannot be the only consideration for utilitarianism (Mill, 1998). Based on utilitarian grounds, the negative impact of the violent games has to outweigh the positive impact. So far however, the positive impact of video games seems to be outweighing its negative