This man should be in criminal court instead of civil court.
Five years of filing false financial reports.
Ralph
http://finance.yahoo.com/news/ExAIG-chief-claims-insurance-apf-14520395.html
It’s very clear that AIG is close to being at the heart of the current financial mess–not fannie and freddie, but AIG. And the problem with AIG is that it’s not just US assets that are at stake, it’s global economies. This article is very good. AIG just announced a quarterly loss of 67 billion. In four months!
http://www.nytimes.com/2009/02/28/business/28nocera.html?_r=1&scp=4&sq=nocera&st=cse
And this follow up is equally good
I agree, the man should be in jail or perhaps publicly hung
A.I.G.was insuring bad debt, recklessly, and without regard for anything that might be considered the real assets of the insured debt.
Which begs the question…where did all those credit default swaps come from that they dealt with?
They came from AIG–the credit default swap was what AIG sold.
What are you getting at?
I understand that. And I understand the concept (I think) behind them. But why did so many of them go bad? They’ve been around for 20 some years.
Because the mortgage bonds loaded more and more ways to profit on the same person’s mortgage payment.
Think of it as an inverted pyramid. The point rests on me, the mortgage payer. My mortgage and yours are packaged together with 50, 000 others and sold as a bond with 12 different repayment schemes. Then those 50,000 are repackaged with another 50, 000 and made into a new bond, while the other bond still exists. It continues, and continues. Because AIG says they’ll insure it.
Then a significant number of people begin to have trouble making their mortgage payments. Why? A significant number–hard to say how many–foolishly took out loans they could not afford. Maybe they were simply irresponsible. Maybe they were betting on future raises that didn’t materialize. Maybe they were lied to by the banks–since after all, the banks would just resell the loans to someone else, and AIG would insure the whole mess, so why worry about whether or not the guy could actually pay?
Maybe the mortgage payer found that the value of his house dropped below the price of his mortgage, and so he walked away. Maybe he lost his job. It’s a cascading effect.
It’s also not clear to me how many defaulted mortgages are on private homes–how many are on businesses? On development projects? I don’t actually know.
But like an inverted pyramid, it was always unstable, and a small set of failures at the point of the pyramid brought the whole huge structure down–including many people who were NOT irresponsible.
I suspect that you want this to end up as “the whole thing is the fault of Clinton for encouraging minorities to buy homes.” I’d say there’s plenty of fault to go around, and i would happily point the finger of blame partly at Larry Summers and Clinton, but at the core of the crisis is banks, and AIG, trying to find ways to extract more and more profit from everybody’s monthly payment, and eventually exceeding that carrying capacity. The problem is not as simple as blaming a neighbor.
I understand that there was an extreme increase in people not paying their home mortagages this month and last. I guess it is a case that people are choosing to pay off the credit cards and other debts, or taking that once in a life time cruise, as opposed to the mortgage because the government is not saying they will bail out all the debt of people in trouble, but just the ones not making their mortgage payments.
Ken Brunt said:A credit default swap is insurance....that is not called insurance to avoid regulation. They sold this "insurance" with out putting aside resources to cover any losses.
Which begs the question........where did all those credit default swaps come from that they dealt with?
As for more people not paying their mortgage last month…you think that might have something to do with the 250,000 layoffs announced in January ? Not to mention the people whose layoffs weren’t publicly announced or who are now only working 4 days a week, or even every other week?
Ralph
I have to think Ralph is probably right–I’d be inclined to blame layoffs for a decrease in mortgage defaults, if there has been an increase. Unemployment in California is, I believe, over ten percent, a figure which as Ralph says doesn’t show “underemployment.” For example, used to get a lot of musical jobs and couple count on 200-1000 a month in gigs. Most of those gigs are gone right now. It’s not crucial for me, but I know a lot of musicians who don’t show as unemployed but who are really hurting.
It’s not clear yet what the terms of this bailout will be. I’ve never missed a mortgage payment, and while galls me to think that some irresponsible jerk might be bailed out, better that than the value of my house collapses. It galls me even more to think that AIG will be bailed out, and some guy who loses his house to unemployment won’t be. But then I don’t think this crisis can be laid at the door of individual homeowners, at least not entirely
I know that we are not the norm in that we have lived in our house for 34 years. It is the only house we have ever owned. The value of our house is that it is a place to lay our heads, entertain and keep our stuff. The value of the homes around us does not seem like as big an argument as it does to lots of neighborhoods and people using homes as an investment. I understand the argument that it will devalue a person’s house if their neighbor is foreclosed on, but that seems only to be if it is speculated that neighborhoods would default and that is not going to happen in the microcosms of most cities. However, that may be the case in areas where entire neighborhoods have been subsidized to create false wealth, instead of reality.
That’s what I was having trouble wrapping my head around…exactly what a credit default swap was and how they lost money if they were selling them. I knew AIG was in insurance company, that’s what had me confused about all this. I have trouble balancing my check book, so this other stuff is greek to me.
I’m not worried about the value of my house going down, it’s worth more to me anyway and I don’t plan on selling it. Besides, I have no idea what it would go for if I did try to sell it.
Five years ago when I retired, I was warned to steer clear of the property market as it was headed for an unhealthy decline in returns and property values. Who told me? A 25-year old co-worker who liked to keep abreast of property values for investment purposes. If this ‘kid’ could foretell the rapid decay in the property market five years ago, then why could not a whole company full of experts? One day the true extent of this scam will become apparent.
Simple fact is that people, who should never have been granted home loans, were encouraged into home ownership by very willing banks. 40% of all nationwide home foreclosures were in California, alone. Loans were granted on unrealistic property values and unreal expectations that property values would rise in a declining market. These 'assets' were onsold and packaged to investors as a sure thing, you cannot lose on investing in land/mortgage scenarios. Loan repayments were high and homeowners saw decreasing property values and diminishing 'returns' on the value of personal home ownership and defaulted on their loans, either by personal financial circumstances, or simply seeing no point in continuing to 'invest' in a dead market. No doubt, many used existing equity in their homes as a base to purchase investment homes. Decreasing returns from these investment properties lead to foreclosures on their principal residence.
It seems that AIG took on the mortgage insurance for all these flawed packaged transactions and are now being held responsible to make good on their financial/legal responsibilities as an insurer. So far at least 300 billion has been paid as a bailout to keep them afloat. If AIG collapse, then we will see a far greater shift in the economy, than anything seen todate.Tim.
Don’t forget the role played by all the ratings agenices such as Moodys and Standard & Poors.
They are the ones who helped promote the “packages” by LYING about the creditworthiness of the investments. They told the rest of the World the “packages” were safe when they clearly, were not safe investments.
The whole mortgage bond thing is odd. It does not really reward anyone’s work, it just generates more money.
My wife and I have our mortgage with a Credit Union, which has promised never to resell it. But my previous mortgage was resold three times in 8 years–I’d get a notice saying “hello your mortgage is now being serviced by…”
What was happening is that my original bank had sold the right to collect my mortgage to another company, which had repacked it with a whole bunch of other mortgages, as a bond. A mortgage bind is a bunch of individual mortgages–thousands of them–bundled together.
The bond buyer gets a set of options about what to buy–different “tranches” they call. It. The first “tranch” might pay a return at 5 years. It would be based on people who early-paid their mortgages, because they moved or sold their house. A second tranch might pay part at ten years and part at 15 or all at twenty: a lot of what investment banks did was attach different bells and whistles to bonds, find ways to make the same bundle of mortgages into different products. So a single bundle of mortgages might produce 10 different “products” that investors could buy.
Meanwhile you and I are slogging along, making those monthly payments. And Wall street is finding new and different ways to make those monthly payments bleed more profit. Eventually the bonds get so complicated that only computers really understand how they are working, and it’s at that point (as I understand it) that AIG begins offering to insure. On a mortgage bond, as I understand it, the pan of one person defaulting is multiplied many times, just as the profit of one person paying is multiplied many times. The structure of all the different “tranches” is shaken. AIG offered to insure this mess, apparently blindly, on the assumption that the market would always go up? I don’t know–I’m waiting to hear what the hell AIG thought it was doing
Meanwhile, emboldened by the insurance ofered by AIG, banker smake more and more risky loans and investment banks keep repackaging them as ever more complicated bonds. There’s a very entertaining account of the 80s, and the origins of mortgage bonds, in Michael Lewis’ book Liar’s Poker
Here is the wikipedia explanation of credit default swaps.
More or less unregulated legalized gambling.
http://en.wikipedia.org/wiki/Credit_default_swaps
Some people became very rich at the expense of the masses.
Ralph
After reading that, I’ll stick with drivin a truck…that didn’t make a damn bit a sense to me…
Ken Brunt said:
After reading that, I’ll stick with drivin a truck…that didn’t make a damn bit a sense to me…
It is complicated. It never should have been allowed. Ralph
Ken,
look at it this way. Your mortgage is onsold by your bank to a hedge fund or investor, as an investment. The hedge fund/investor is only say 90% sure that you will make all your payments, so they ‘insure’ your mortgage with a company like AIG. AIG charge an annual premium to the hedge fund/investor, of say 10% of the value of the mortgage, to cover the full value of the mortgage, in case you default. Now multiply this millions of times over. In a boom time with increasing property value and full employment, then a windfall for AIG as a minimal number of defaults. In a recession and massive foreclosures, then the proverbial hits the fan.
What tim said
I guess you could say the methods used are much like Factoring finance in business. Now called Cashflow Finance. Where you sell a legitimate invoice to a Finance Company for cash flow in your business.