27 Feb 09
Originally posted by ScriabinEasy...greed; long-term effects-years to decades; AIG's fault, and whoever had fiscal oversight of them (gov't?). Sorry to be brief, but I'm short-winded tonight.
Ok, genuises. Let's hear you tell us all why the conglomerate insurance and financial giant AIG, which operated in 130 countries with net assets of over $1 trillion collapsed.
What happened, why did it happen, what effect did it have on the world's economy, and whose fault is it?
27 Feb 09
Originally posted by Metal BrainSo, would I be accurate to say that the illustrious Barney Frank, through Freddie Mack and Fanny Mae, allowed people who could not afford a house in the first place purchase one through susidized motgages. Now, these people cannot afford the mortgage, or the house is below market value of the original price, and now responsible home buyers will have to 'bail' them out?
AIG insured many of the American mortgage backed securities that lost so much value. When the housing values fell AIG had to pay up. AIG had other financial exposures they had to pay for as well, but the mortgages were the primary reason.
27 Feb 09
Originally posted by ScriabinIts not the insurance arm that caused the collaspe, its the investment arm with its "dodgy investments"
Ok, genuises. Let's hear you tell us all why the conglomerate insurance and financial giant AIG, which operated in 130 countries with net assets of over $1 trillion collapsed.
What happened, why did it happen, what effect did it have on the world's economy, and whose fault is it?
The losses of the investment arm where greater then all the profits from the group
The insurance arm in London for exmaple is very profitable
27 Feb 09
1 edit
Originally posted by ScriabinIt s governmental conspiracy to destroy the US ecomony so as to increase the influence and power of government through such actions as recently nationalizing Citi Bank. Then they can implement some sort of one world order as the world becomes one great socialistic system. To do this, however, the US must be brought to the economic level of all the other world powers as its brought to its economic knees.
Ok, genuises. Let's hear you tell us all why the conglomerate insurance and financial giant AIG, which operated in 130 countries with net assets of over $1 trillion collapsed.
What happened, why did it happen, what effect did it have on the world's economy, and whose fault is it?
Edit: Just thought I would provide you with some more amusing right wing dialogue that I'm sure you have heard before. Anything for a good laugh. 😛
27 Feb 09
2 edits
Originally posted by ScriabinYour question answered sir. (The best part is the last half)
Ok, genuises. Let's hear you tell us all why the conglomerate insurance and financial giant AIG, which operated in 130 countries with net assets of over $1 trillion collapsed.
What happened, why did it happen, what effect did it have on the world's economy, and whose fault is it?
There’s nothing fundamentally wrong with the core insurance business units of AIG (NYSE:AIG). The company’s downfall was an accumulation of misplaced bets on credit default swaps.
By the best estimates of the Bank for International Settlements (BIS) the notional value of credit default swaps is some $62 trillion.
A credit default swap (CDS) is like an insurance policy. It’s a financial derivative that a debt holder can use to hedge against the default by a debtor corporation. A CDS can also be used to speculate.
A subsidiary of AIG wrote insurance in the form of credit default swaps. It offered buyers insurance protection against losses on debts and loans of borrowers to the tune of $447 billion.
But the mix was toxic.
It also sold insurance on esoteric asset-backed security pools — collateralized debt obligations (CDOs), pools of subprime mortgages, pools of Alt-A mortgages, prime mortgage pools and collateralized loan obligations. The subsidiary collected a lot of premium income. Its earnings were robust.
When the housing market collapsed imploding home prices resulted in rising foreclosures. The mortgage pools AIG insured began to fall in value. The credit crisis also began to take its toll on leveraged loans, and it saw mounting losses on the loan pools it had insured. In 2007, the company was starting to feel serious heat.
From its humble beginnings in China in 1919, through the 40-year tenure of CEO Maurice R. “Hank” Greenberg, which ended ignominiously for Greenberg in 2006, AIG grew aggressively. Greenberg grew and diversified the insurance giant, ultimately amassing a trillion-dollar balance sheet.
But not everything was Kosher.
In an effort to assuage analysts and maintain leverage the firm entered into sham transactions to affect the appearance on its balance sheet of $500 million of loan-loss reserves, which analysts had been questioning as formerly declining. The result was a 2006 Securities and Exchange Commission enforcement action, a $1.6 billion settlement and the removal of Greenberg. Greenberg is still fighting civil charges related to his actions at the firm.
As 2007 progressed, so did the losses on AIG’s books and credit default swaps.
Once again, it appears that AIG tried to manage the problem through accounting maneuvers. Last February, for instance, AIG said,”its auditor had found a material weakness in its accounting.”
It had not been properly valuing its CDO liabilities and swap-related write-downs. The losses were revealed to be in excess of $20 billion through this year’s first quarter. The SEC is once again investigating, as are criminal prosecutors at the U.S. Justice Department and the U.S. Attorney’s Office in Brooklyn.
After writing down assets against gains elsewhere, AIG posted cumulative losses of $18 billion over the last three quarters. In February, AIG posted $5.3 billion in collateral against credit default swap contracts it had written. In April, AIG had to post an additional $4.4 billion in collateral. When rating agencies Standard & Poor’s, Moody’s Investors Service (MCO) and Fitch Ratings Inc., lowered the firm’s ratings last Monday evening, it triggered an additional $14 billion collateral call as margin against AIG’s credit default swaps.
The company didn’t have the cash.
Indeed, the dire need for cash collateral on top of mounting losses on warehoused CDO “assets” on the company’s balance sheet necessitated a massive infusion of capital. That’s what happened to AIG.
But once again, there’s the story… and there’s the story behind the story.
There’s a problem - an inherently systemic problem - and it has to do with how structured investments like tranched collateralized debt obligations (CDOs), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and credit default swaps on them and on corporate debts and loans are actually valued.
Individually, CDOs are hard to value. Suffice it to say, legend has it that constructing the cash flow payments on the first theoretical 3-tranche CDO (the simplest type of CDO) took a Cray Inc. (CRAY) supercomputer 48 hours. Now try and value credit default swaps on them!
Because there are so many different individual CDO securities, and because there are so many credit default swaps on so many of these CDOs, and so many swaps on individually referenced entity debts and loans, the only way to value them in a portfolio is by indexing.
That’s right: there are indexes. And guess what? You can trade the indexes! Markit Group Ltd., of London, constructs and manages the CDX, ABX, CMBX and LCDX family of credit-default-swap indexes. Investopedia has a decent little tutorial.
Here’s the problem: if you own a portfolio of CDOs and the only way to value them (or, at least, to develop a valuation that others are reasonably certain to respect) is by looking at them through the prism of an index of credit default swaps on them, you’re at the mercy of the index. Your portfolio - your securities - may not be so bad. But you may not really know based on mortgage-duration analysis and foreclosure events that you can’t calculate. So you value, or mark-to-market, against the closest index.
Here’s the rub. What if other speculators are selling short - betting in anticipation of that index going down? What if large portfolio-hedgers are selling short the index to hedge the portfolio they can’t sell because no one will buy it - because no one knows what it’s worth?
It’s crazy. And it gets worse.
What if you’re running a profitable company that needs to borrow money but credit default swaps (bets against your ability to pay back your debt) are expensive by virtue of speculators fear and greed, such that, if any bank looks at where the CDS pricing on your paper is trading, they tell you: “Sorry, but we can’t lend you money because the market for credit default swaps thinks you’re a bad bet.”
You don’t get the loan. You can’t build your factory. You can’t produce, and you have nothing to sell. The upshot: Now you actually are going out of business. Is this self-fulfilling?
Ponder this: Last Monday, as AIG was initially seeking $20 billion in capital and actually had it in hand (by virtue of a deal with New York insurance regulators), traders were bidding up credit default swaps on AIG’s debt and loans so furiously that based on the insurance premiums traders were actually paying for default insurance on AIG… the company was already dead. Self-fulfilling?
Credit default swaps are creating a downward spiral in the capital markets, driving up the cost of capital and squeezing out all manner of borrowers. And these speculative bets run amok are undermining all U.S. Federal Reserve and U.S. Treasury Department efforts to “liquefy” the system. If this keeps up, the credit default market could sink the U.S. economy into a recession/depression that will make the Great Depression look like a day at the beach.
Anyone got a towel?
http://www.contrarianprofits.com/articles/the-inside-story-of-the-collapse-of-aig/5641
27 Feb 09
Originally posted by uzlessYep. I was going to link that same article but you beat me to it. Here's another that you may find interesting. It discusses the Gaussian copula function that was used to price CDO's, and the insane assumptions behind it.
Your question answered sir. (The best part is the last half)
There’s nothing fundamentally wrong with the core insurance business units of AIG (NYSE:AIG). The company’s downfall was an accumulation of misplaced bets on credit default swaps.
By the best estimates of the Bank for International Settlements (BIS) the notional value of credit default swap ...[text shortened]... wel?
http://www.contrarianprofits.com/articles/the-inside-story-of-the-collapse-of-aig/5641
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
As for the blame, it goes far and wide. But if I had to pick just one it would be the rating agencies. Had they done their job no A-rated CDO would have ever existed.
28 Feb 09
Originally posted by whodeyYou may be joking but that is actually close to the truth.
It s governmental conspiracy to destroy the US ecomony so as to increase the influence and power of government through such actions as recently nationalizing Citi Bank. Then they can implement some sort of one world order as the world becomes one great socialistic system. To do this, however, the US must be brought to the economic level of all the other wor ...[text shortened]... musing right wing dialogue that I'm sure you have heard before. Anything for a good laugh. 😛
http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
Certain regulations that were put in place after the great depression were repealed. This was no accident. There is lots a blame to go around but if I were to pick one person that I think deserves the most of it, I would blame Bill Clinton. He signed two pieces of legislation into law. He even sided with the republicans against his own political party. Bill Clinton is an extremely corrupt man.
The Commodity Futures Modernization Act and the Gramm-Leach-Bliley Act. Mystery solved. And you didn't believe in conspiracies. read it and weep!
28 Feb 09
Originally posted by Metal BrainWho's joking? ðŸ˜
You may be joking but that is actually close to the truth.
http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
Certain regulations that were put in place after the great depression were repealed. This was no accident. There is lots a blame to go around but if I were to p ...[text shortened]... amm-Leach-Bliley Act. Mystery solved. And you didn't believe in conspiracies. read it and weep!
28 Feb 09
Originally posted by dystoniacThere was predatory lending going on and that was a factor. Allan Greenspan lowered interest rates too much and caused the housing bubble to grow. He would be the 2nd person I would blame after Bill Clinton.
So, would I be accurate to say that the illustrious Barney Frank, through Freddie Mack and Fanny Mae, allowed people who could not afford a house in the first place purchase one through susidized motgages. Now, these people cannot afford the mortgage, or the house is below market value of the original price, and now responsible home buyers will have to 'bail' them out?
Sure, people should have known that they could not afford the mortgage payments in the long term but it is hard to blame them for being stupid. We all know people can be stupid. That is why we have social programs, to protect the stupid from themselves. I'm sure the banks knew that better than anybody. They just didn't care. Either that or they were stupid too.