Insurance requires a risk. Without a risk that an event will or will not occur, the transaction is not insurance against risk, it is a wager that something will happen. This is pretty basic stuff, Insurance 101 you might say.
If the game is rigged, i.e., if the outcome is fixed ahead of time, the party arranging that game should it seems be exposed to liability. In Insurance terminology, the party that arranges Insurance between an Insurer and an Insured is a Broker. If an Insurance Broker brokered a fixed arrangement against the interests of the Insured Policyholder, then the Broker would be subject to potential liability including perhaps a Claim or Cause of Action for Bad Faith, Breach of Fiduciary Obligations.
Reportedly, synthetic collateralized debt obligations offered the same potential for exposure to externally imposed liability:
Hudson, like Goldman's 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds.
Louise Story, "Goldman Faces 5 New Mortgage Allegations" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Tuesday, April 27, 2010). Another vehicle which presents similar potential is a so-called hybrid collateralized debt obligation, which is a "hybrid" because it is a CDO which contains both a bundle of insurance contracts and mortgage bonds. See id.
There is one new player in CDOs, however, that does not seem to have an analogy in the Insurance model of doing business, and that is a "liquidation agent". A liquidation agent in such a deal receives yet another payment or Premium as "the party that took it apart when it hit trouble," whatever that means in reality. Id.
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Wow, theirs some nice links there - where do you find them all? I’m going to read all those through in detail and apply a few.. Thanks for sharing!
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Posted by: Account Deleted | June 25, 2011 at 06:16 AM