AMERICAN CONSERVATISM IN 2008 AND BEYOND

old europe wrote:

Foxfyre wrote:

AIG sold billions in insurance policies underwriting those bonds. When the bonds began to crash and the insureds began filing claims, AIG was paying out billions instead of taking in billions. And because AIG's own stock was falling in the process and a declining economy resulting in fewer people needing insurance of any kind, it didn't have enough to cover the claims.

No, that's false.

A "declining economy resulting in fewer people needing insurance of any kind" or "AIG's own stock was falling in the process" wasn't the reason that AIG couldn't pay out those hundreds of billions of dollars.

You're making this up.

Okay. I could be wrong. I am neither a PhD economist nor do I work in securities so I am dependent on what I read by others to form my opinions.

Where am I wrong?

JM, Most of the Mae and Mac problems originated during BUSH's term. Aint' that somet'n? FACT: All eight years.

Cicerone imposter wrote:

Quote:

JM, Most of the Mae and Mac problems originated during BUSH's term. Aint' that somet'n? FACT: All eight years.

Oh? What facts would that be? No need to post the fact that the Bush admin tried to reel in Fan and Fred but, in the spirit of de-regulation ,were rebuffed by Barney and Chris's efforts of "dice rolling" with taxpayer money. Also since you reference only a specific 8 years there is no need to go way back to the Clinton influence via the CRA.

But it's not about Repub or Dem Admins. If Bush and other politicians had closely followed MAC principles there would be no need for finger pointing. The best way to decrease government mismanagement of our money is to give them less of it. The easiest way to accomplish that is keep government as small as possible.

JM

[edit] Relation to 2008 financial crisis
See also: Subprime mortgage crisis and Global financial crisis of 2008"2009

Some economists, politicians and other commentators have charged that the CRA contributed in part to the 2008 financial crisis by encouraging banks to make unsafe loans. Others however, including the economists from the Federal Reserve and the FDIC, dispute this contention. The Federal Reserve and the FDIC holds that empirical research has not validated any relationship between the CRA and the 2008 financial crisis.[56][57]

Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.[51] In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[58] In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.[59] Jeffrey A. Miron, a senior lecturer in economics at Harvard University, in an opinion piece for CNN, calls for “getting rid” of Fannie Mae and Freddie Mac, as well as policies like the Community Reinvestment Act that “pressure banks into subprime lending.”[60]

However, others dispute the involvement of the CRA in the crisis. San Francisco Federal Reserve Bank Governor Randall Kroszner has stated that no empirical evidence had been presented to support the claim that "the law pushed banking institutions to undertake high-risk mortgage lending".[56] In a Bank for International Settlements ("BIS") working paper, economist Luci Ellis concluded that "there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust," relying partly on evidence that the housing bust has been a largely exurban event.[61] Others have also concluded that the CRA did not contribute to the current financial crisis, for example, FDIC Chairman Sheila Bair,[62] Comptroller of the Currency John C. Dugan,[63] Tim Westrich of the Center for American Progress,[64] Robert Gordon of the American Prospect,[65] Daniel Gross of Slate, and Aaron Pressman from BusinessWeek.[66]

Some legal and financial experts note that CRA regulated loans tend to be safe and profitable, and that subprime excesses came mainly from institutions not regulated by the CRA. In the February 2008 House hearing, law professor Michael S. Barr, a Treasury Department official under President Clinton,[67][34] stated that a Federal Reserve survey showed that affected institutions considered CRA loans profitable and not overly risky. He noted that approximately 50% of the subprime loans were made by independent mortgage companies that were not regulated by the CRA, and another 25% to 30% came from only partially CRA regulated bank subsidiaries and affiliates. Barr noted that institutions fully regulated by CRA made "perhaps one in four" sub-prime loans, and that "the worst and most widespread abuses occurred in the institutions with the least federal oversight".[68] According to Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, independent mortgage companies made risky "high-priced loans" at more than twice the rate of the banks and thrifts; most CRA loans were responsibly made, and were not the higher-priced loans that have contributed to the current crisis.[69] A 2008 study by Traiger & Hinckley LLP, a law firm that counsels financial institutions on CRA compliance, found that CRA regulated institutions were less likely to make subprime loans, and when they did the interest rates were lower. CRA banks were also half as likely to resell the loans.[70] Emre Ergungor of the Federal Reserve Bank of Cleveland found that there was no statistical difference in foreclosure rates between regulated and less-regulated banks, although a local bank presence resulted in fewer foreclosures.[71]

Cyclop, dear, you apparently don't even understand the information in your own link. It in no way rebutts anything I've said but simply explains the mess that AIG is in.

I certainly have no problem believing that that AIG is in a mess. But the article does not rebutt any part of my take of what got us into this financial mess that we're in.

It didn't start with AIG.

You are as blind as Cyclop. You are fixated on that word 'forced' which nobody has used ever, at any time, in this entire debate except you two.

I have provided credible sources to support my opinion. You and Cyclop have provided nothing.

So who is Milton Berle? Credentials? Who is he affiliated with? I can't pull up a bio on him and I usually can pull up a bio on those who do know what they're talking about on this stuff when they publish. If you can identify him as somebody with decent credentials to write the piece, then yes, that would be a credible rebuttal.

And OE, I'm still waiting for your sources proving that I am clueless about AIG too.

I wonder, that all a few people have to do is assert that something is responsible for the bad behavior of banks, and suddenly it's a 'fact.' Where is the data behind claims the CRA is responsible for the housing crash?

I certainly have not seen it.

Cycloptichorn

I didn't say that the CRA was responsible for the housing crash. Nobody else with a clue has said that either.

Now we the people can continue to wring our hands and point fingers and lay blame and absolve ourselves of all culpabiility while crying how terrible it is. . .

or. . .

We can begin to identify what really caused the problems and make our elected leaders aware with great clarity that we know.

I posted another article on how AIG got into this mess. Did you even read it?

These questionable standards are 'business as usual' today at Fannie and Freddie. They continue to buy pools of mortgages where the required equity of a borrower has been replaced with an insurance company's promise to pay. The incredible part is that one of those “approved’ insurers continues to be AIG.

Twenty-two percent of Fannie's 08 business was enhanced. AIG was one of the biggest providers of the PMI coverage.

And OE, I'm still waiting for your sources proving that I am clueless about AIG too.

An AIG Unit's Quest to Juice Profit
Securities-Lending Business Made Risky Bets. They Backfired on Insurer

By SERENA NG and LIAM PLEVEN


Inside American International Group Inc., executives called the goal "10-cubed."

It was shorthand for producing 1,000 million dollars -- $1 billion in annual profit -- from the insurer's AIG Investments unit, which managed money for AIG's own insurance companies and outside investors. In its pursuit of that goal over the past few years, said current and former employees, the unit took on additional risks in a sideline business known as securities lending, traditionally a way for insurers to squeeze a few extra pennies from their investment portfolios.

Accounts of AIG's near collapse have largely focused on soured trades entered into by the company's Financial Products division. But a close look at the 2,000-employee AIG Investments unit shows how this part of the conglomerate made gambles that helped cripple the firm.

In running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime-mortgage bonds. That turned out to be a riskier approach than some rivals', who parked cash from securities lending mostly in low-risk or short-term investments such as Treasury securities and commercial paper, according to analysts.

The idea behind securities lending is to take advantage of large numbers. Insurers like AIG accumulate large quantities of long-term corporate bonds and other securities, earmarked to pay claims down the road. They can goose that return by lending out the securities to banks and brokers in exchange for cash collateral. The insurers then invest that cash to squeeze out a bit more yield for themselves and the securities borrowers. They usually achieve this by parking the cash in other fixed-income investments, such as Treasury bonds or short-term corporate debt.

The extra profits can be just hundredths of a percentage point. But when applied to tens of billions of dollars of securities, the returns can be significant.

At one point, AIG Investments was putting about $70 billion into subprime-mortgage bonds and other higher-risk assets, said people familiar with the matter. These choices helped AIG squeeze an additional 0.2 percentage point in yield, or roughly $150 million in revenue.

AIG's spokeswoman said the firm "invested counterparty cash in highly liquid, floating rate, triple-A-rated" residential mortgage-backed securities.

The approach backfired, exacerbating the liquidity crunch that forced the U.S. government's initial $85 billion bailout of AIG in September. The losses didn't stop then: Besides a $60 billion credit line to AIG, the Federal Reserve last December provided $19 billion to wall off losses purchased by AIG Investments' securities-lending program. In all, the total rescue package now sits at $150 billion.

U.S. taxpayers are shouldering much of the burden of AIG Investments' troubled mortgage assets. If the securities, currently valued at about half their original value, are hit by defaults in the coming years, taxpayers could lose out. But if they bounce back, taxpayers could log gains.

An AIG spokeswoman said its securities-lending portfolio "came under pressure due to extreme market liquidity issues," adding that "it is our expectation that taxpayers could realize material benefits on their investment in this portfolio."

The idea of "10-cubed" was the inspiration of 59-year-old Win Neuger, who joined AIG in the mid-1990s. As chairman and chief executive of the unit, he brought together the investment functions of AIG's global insurance subsidiaries and started a third-party asset-management business within the unit, getting pension funds and other institutions to invest money alongside AIG's. By September 2008, the unit was managing $565 billion in assets for AIG's insurance subsidiaries and $111 billion for external clients. Those numbers have since declined.

In late 2005, Mr. Neuger set the $1 billion profit target, noting in an internal presentation that the unit was "one of the fastest-growing profit contributors" to parent AIG.

Mr. Neuger, who was also AIG's chief investment officer up until last month, was the group's fourth-highest-paid executive with compensation of nearly $7.8 million in 2007, according to an AIG filing with the Securities and Exchange Commission. Much of that compensation was linked to AIG stock, which plunged in value last year, though more than $2.1 million was in salary and bonuses. He declined to comment.

The bulk of AIG Investments' profits came from fees it received for managing money. Another area Mr. Neuger identified for growth was AIG's securities-lending business, said people familiar with the matter.

From $1 billion in 1999, AIG's securities-lending portfolio ballooned to $30 billion in 2003 and $60 billion in June 2005, according to an internal presentation to employees in December 2005. Much of that growth came from lending out corporate bonds owned by AIG's large life-insurance and retirement-services subsidiaries, according to the presentation.

In December 2005, executives from AIG Investments proposed to AIG's credit-risk managers a set of guidelines for the securities-lending business. One was to invest up to 75% of the cash collateral it received in "asset-backed securities," according to people familiar with the matter. These securities are backed by loans including subprime mortgages and credit-card debt, and pay more interest than corporate bonds with similar credit ratings.

Mr. Neuger and Kevin McGinn, who has been AIG's chief credit officer since 2004, signed off on the proposal, agreeing in a memo that the guidelines didn't subject the portfolio to undue risk, according to people familiar with the matter. Around that same time, worries about loose lending standards in the subprime market led managers of a separate AIG division -- AIG Financial Products -- to stop committing to writing credit derivatives on securities backed by subprime collateral.

Mr. McGinn declined to comment.

Following the new guidelines, money managers at AIG Investments ramped up purchases of subprime-mortgage bonds in 2006 and 2007, as the securities-lending portfolio expanded to $94 billion in mid-2007. The additional yield from investing the cash collateral helped boost profits at AIG Investments, which earned pretax profit of $466 million in 2007, up 30% from the previous year.

The securities-lending division was obligated to repay or roll over most of its loans every 30 days. AIG Investments placed much of the cash in subprime debt that matured in two to five years. It didn't have to liquidate the positions, as long as other banks and dealers were willing to place more cash with AIG, according to people familiar with the matter.

Starting in mid-2007, prices of many subprime-mortgage bonds plummeted as loan delinquencies increased and credit markets froze.

In a November 2007 note to AIG Investments' staff, Mr. McGinn wrote, "Senior management was clearly caught off guard by the size of [AIG Investments'] subprime, first-lien [residential mortgage-backed securities] portfolio despite the portfolio's high ratings and credit quality."

As scrutiny over AIG's exposure to the subprime market increased in late 2007, AIG's risk managers instructed the investment unit to start paring its lending portfolio.

An AIG spokeswoman said that, starting in the summer of 2007, it became "increasingly difficult for AIG to meet its liabilities without liquidating asset-backed securities at dislocated market prices."

The securities-lending portfolio had shrunk to roughly $70 billion by September 2008, when AIG's problems reached a critical point. Credit-rating services downgraded AIG's ratings, allowing trading partners on credit derivatives sold by its financial-products unit to demand billions more in collateral from the firm.

The problems in the securities-lending program weren't over. In early October, many dealers returned the securities they had loaned from AIG, demanding their cash back, further straining AIG's finances.

On Oct. 8, AIG announced a deal with the Fed to try to contain the securities-lending problems, a move that expanded the bailout to more than $122 billion. Then, in December, the Fed and AIG bought the distressed investments through an entity they jointly formed. AIG also said it would end its securities-lending program.

AIG is in the process of splitting up AIG Investments as it prepares to sell the business of investing third-party assets, which Mr. Neuger plans to continue overseeing when it is spun off.

Write to Serena Ng at [email protected] and Liam Pleven at [email protected]

Foxfyre wrote:

I posted another article on how AIG got into this mess. Did you even read it?

This one? Oh, sure, I did. Here's the key quote:

Quote:

These questionable standards are 'business as usual' today at Fannie and Freddie. They continue to buy pools of mortgages where the required equity of a borrower has been replaced with an insurance company's promise to pay. The incredible part is that one of those “approved’ insurers continues to be AIG.

Twenty-two percent of Fannie's 08 business was enhanced. AIG was one of the biggest providers of the PMI coverage.

Of course, it doesn't explain why AIG was and is insuring subprime mortgage packages - it just states that it does.


The fact that you're simply being blind to is that AIG decided to get into the business of selling insurance for subprime mortgage packages, and that, by exploiting a loophole in the law, AIG sold those insurance policies without having the assets to back them up.

Once the subprime mortgages that were bundled in those MBSs defaulted, AIG had no means of paying them back.