DS: OK.
LL: Because it's a, fantasy baseball is a synthetic derivative. In fantasy baseball, you and 12 other people get together and form a league and you draft real baseball players onto your team and you get ranked by how many home runs, RBIs, stolen bases, etc., your team has. And you own players, but you don't really own them. The person, the real major league baseball player, if I have Derek Jeter on my team, Derek Jeter doesn't know he's on my team. In fact, he's probably on a couple of thousand or 15,000, or 20,000 fantasy baseball teams right this very moment. Nobody owns him other than the New York Yankees, but he's part of all these fantasy leagues.
And there is betting taking place right in these various leagues. The winner gets a certain amount of money, second place gets a certain amount of money. And money will exchange hands at the end of the year, and there are books that you can buy based on, you know, how to play fantasy baseball. There are stat services that track this every day for the teams involved. So there's a whole enterprise surrounding fantasy baseball, which is all, it's a game based on owning real players but you don't really own them. You just track their statistics. Your team is derived, a derivative, a synthetic one, based on real major league baseball.
Well, the same thing happened in housing. The housing market that all these bets, these betting leagues were based upon, all these fantasy finance securities were based upon, hit a limit. At a certain point prices couldn't go up any more and they started to go down. It was the equivalent of going on strike. And when they did start to go down, all these betting leagues, securities that were based on it in the superstructure, just like fantasy baseball, all those instruments started to crash in value. And when they crashed, everything around it started crashing, and you had an enormous implosion of financial worth.
There is a school system, there are five school systems in the Milwaukee area that got snookered into buying $200 million worth of these fantasy finance securities. Kenosha, for example, spent $37 million, and they were doing this to try to raise money for a retiree benefit fund. And that $37 million when the crash took place is now worth, in one year it went from $37 million to under $1 million. That's how far it crashed, the fantasy finances had crashed. And this is what happened all over the globe.
Now, your question is, why couldn't we let this happen? Well, if we just let, here's the situation we were in: The banks had not only created and sold these fantasy finance instruments, but they kept a lot of them as well. The ones they couldn't sell they kept on their books because they looked very valuable. Other people wanted them. And so, and they had these offshore, off-book connections where they set up these things in the Cayman Islands, these separate little corporations that were basically where the game was being played. They had those, too.
Well, once the crash started, their books were littered with these valueless, if they sold them they would be worth the same thing as the Kenosha school system. They would go from $37 million to less than $1 million. And then if, if they did this, then the bank itself would be insolvent. It would go under. It would have to file for bankruptcy which is kind of what happened, which is exactly what happened to Bear Stearns and it was merged away and then it happened to Lehman Bros., and the markets all over the world started to collapse.
And it was about to happen to AIG. And I've got to tell that story because then you'll see what would happen if we let it collapse.
DS: OK.
LL: AIG decided that what it was going to do was insure other people's bets. In other words, it would be like if I had a fantasy baseball team and it would say, OK, we're gonna, if you finish in the bottom two out of 12, we'll make up the difference. We'll provide insurance, financial insurance for you. And you'll pay us a certain amount four times a year and a certain amount up front and we'll get those fees and if something goes wrong with your team, we'll insure it.
Well, they figured if they insured enough different teams, enough different speculative securities, they couldn't all go south at the same time. So they would, so they decided to insure more and more. And they figured out that this was a gold mine, because they had a AAA rating themselves, and as a result, in their contracts, their insurance contracts (they don't call it insurance because that would be illegal, that's regulated; they call them credit default swaps, that's not regulated – still not regulated), so they issued these insurance policies basically on these risky financial securities. And they figured, we'll do enough of them and we'll make a huge amount of money because we don't have to put up anything in return. We have a AAA rating, we will get all these fees, this was the most profitable of any of the divisions within AIG. They were going to get all these fees without putting up anything in return. Cost them almost nothing.
So they issued $450 billion worth of insurance. Well, when the economy started to go down, the housing market collapsed, and these various fantasy finance instruments started to get into trouble, they had to quickly come up with money to cover their bets. Well, very quickly they didn't have enough money, and once they didn't have enough money, their rating agencies were about to switch their rating from, or did switch their rating away from AAA which meant that the people who were on the other side of the bets were allowed to then take their assets, or AIG had to quickly sell the assets.
Now, if AIG, AIG didn't have, couldn't possibly raise enough money in time, and no one is going to lend them any money, so they would have gone under. If they went under, and they were about to go under, they would have owed $450 billion to all these other financial institutions all over the world. Had they not paid their bets, those institutions would have gone under. Those institutions also did the same thing. They had bets to other institutions. They wouldn't have been able to pay off their bets. And you would have seen a domino situation right around the globe.
We were a millisecond away from that massive meltdown, and, you know, whatever criticisms I may have of how it was done and what, you know, the various administrations were up to, the Bush administration in the end, had they not acted on AIG, we'd be selling pencils on the street right now. It would be a disaster. Bank after bank after bank after bank would have folded.
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