Michael Osinski - How One Man Broke the US Economy

[GG]

I saw Ranieri in a video from Mike Milken's recent conference and I wouldn't pin the blame on him. That's like saying Samuel Colt was ultimately responsible for drive by shootings.

 

Securitization, in and of itself, isn't a bad innovation. It's the unscrupulous folks who took advantage of the system while the SEC twiddled its thumbs that bear the largest blame, IMO...

 

Don't misinterpret, I'm not blaming him. I'm just saying that if you were to pick one guy ho started it all, it would be Lou.

 

I also don't like to use the word "blame" as there were so many parties involved that ate up the free lunch, it was in nobody's interest to stop the music. It turned into a mutual self reinforcement club - you looked at four risks, and were comfortable with three and you knew that the fourth risk would never happen because there's no way the guy across from you would let that risk go unchecked.

[DC Tom]

I saw Ranieri in a video from Mike Milken's recent conference and I wouldn't pin the blame on him. That's like saying Samuel Colt was ultimately responsible for drive by shootings.

 

But IF I were to pick one person most responsible for drive-bys, it might very well be Colt.

 

Kind-of GG's point. Ranieri created the market...but it took millions of people abusing it to get it where it is.

 

Securitization, in and of itself, isn't a bad innovation. It's the unscrupulous folks who took advantage of the system while the SEC twiddled its thumbs that bear the largest blame, IMO.

 

I'm still not sure much was necessarily the SEC's fault. Things were securitized, and re-securitized, and re-securitized to the point where the risk was "mitigated" (really, completely unmeasurable, high or low) according to a model used by everybody in the industry including the SEC. And at it's most fundamental basis, the risk lay with the original crappy mortgages...something the SEC doesn't (and in my opinion shouldn't) regulate anyway.

 

The only way I could see the SEC effectively mitigating a situation like that is by dedicating themselves in part to independently verifying and vetting every security and risk model the financial industry uses, if not establishing actual standards for such. That'll simply never happen as a practical matter, as the rocket scientists required for that kind of work would never work for what the SEC pays.

[Magox]

OK, assuming your supposition is correct, and you're the expert, you should have no problems answering some Qs

 

 

 

What was the share of RMBS underwriting by financials who were previously subject to GS vs those that weren't?

 

 

 

Did anything else happen in the economy, technology or in financial markets at that time? Or was the repeal of GS the only thing? You are talking about an 11-yr time frame.

 

 

 

What is liquidity?

 

 

 

Which risk was he referring to?

 

 

 

Were FanFred covered by GS? If not, why bring them into the discussion?

 

Did GS govern banks' credit standards? If not, why bring them into the discussion?

 

 

 

Did SIVs, CDOs & other securitizations exist before GS was repealed? If they did, why bring them into the discussion?

I enjoy a good debate. But in order to debate this properly, one has to understand what the whole underlying premise of the Glass-Steagall act. This is not intended to be a slight towards you GG, but I honestly don't believe you understand the concept of the GS . If you don't fully understand the GS act then it will be impossible for you to understand the ramifications of the repeal of the GS act.

 

But I will try to answer some of your questions, as anecdotal as they may be.

 

In regards to this question:

 

Did anything else happen in the economy, technology or in financial markets at that time? Or was the repeal of GS the only thing? You are talking about an 11-yr time frame.

 

I do want to say, that I dont fully blame the financial disaster on the repeal of the GS, but as I stated earlier, it opened up the gates to where we are.

 

There is plenty of blame to go around.

 

1) The Federal Reserve played a large role in this. Greenspan slashed interest rates and kept them down for too long, which made credit very cheap

 

2) Home buyers and their greediness, who took advantage of the cheap credit, which helped to create a huge demand for houses, therefore bidding up home prices.

 

3) Real Estate agents who worked for the people selling homes rather than the buyer, getting the higher commissions.

 

4) The Clinton Administration, who repealed the Glass-Steagall act and also pushed for less stringent credit and down payment requirements through Freddy and Fannie.

 

5) Mortgage brokers who dealt in these "exotic" predatory loans (subprime and interest only).

 

6) Alan Greenspan for pushing the repeal of the GS act going as far back as the early to mid 80's.

 

7) Alan Greenspan once again for his lack of forsight in miscalculating risk and the effects of a model that he never thought would be broken

 

8) Alan Greenspan again, for encouraging Americans to take out adjustable mortgages.

 

9) Wall Street Firms and their greed, who bundled the Mortgage Backed securities (MBS) and issued bonds using these securities as collateral.

 

10) The Bush Administration for lack of oversight and pushing deregulation.

 

11) Using mark-market accounting which had the effect of making the assets less on paper, than in the real market. (mark-market accounting also allowed companies like Enron to manipulate and distort future earnings based on false and overly optimistic profit models that were never realized. This is how mark-market accounting can be used deceptively in the opposite spectrum)

 

12) The U.S as a whole, our arrogance, how we thought this balloon would never burst, no matter how high it went or how fast.

 

13) The lack of investigative reporting, and mainly reporting the upside and how things will go on and on, (CNBC).

 

 

 

To advance our discussion, we have to understand the GS act. The reason why the GS act was enacted was in response to lack of regulation and an over abundance of speculation that helped lead us to the stock market crash of 29 and the great depression. The FDIC was formed as a direct result of the GS act and there were many banking reforms that were also passed. Very similar to today.

 

Remember, the whole point of GS was to stop a future occurence of a deflationary episode and to make sure that there is enough government oversight and regulation to try to prevent these situations from occuring again.

 

The reason why they repealed the GS act was that huge depository institutions such as commercial banks like Citigroup for instance, would now be able to operate in “deregulated” financial markets. . They were losing market shares to other securities firms that were not so strictly regulated, it caused these huge commercial banks and depository institutions to compete, and when they compete and fight for profits including foreign companies, which you aluded to earlier, then risk management becomes a secondary concern. Remember, foreign companies didn't have to abide by the GS act, so it created unfair competitive advantages to foreign depository institutions, which pressured the repeal of the act.

 

Secondly, it was a form of diversification. The thinking behind it was that they believed that securities activities that these depository institutions were seeking were supposdedly both low-risk, and would reduce the total risk of organizations offering them. (boy were they wrong on that one)

 

Of course, there was a lack of risk management and the pitfalls of the GS act were tremendous. These depository institutions possessed enormous financial power, let's remember they are controlling other people's money, so they must ensure soundness and competition in the market for funds, whether it be through loans, deposits or investments. They failed miserably in this area. Securities activities are very risky, which can lead to enormous losses. These possible losses could threaten investors deposits and investments. In turn, the Government insures deposits through the FDIC and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

 

Let's not forget that Depository institutions are supposed to be able to manage risk. It's people's deposits for crying out loud. When these institutions enter unregulated markets, and they are competing for profits against other smaller and less responsable institutions in a more speculative securities businesses, which btw, many of these institutions were not equipped properly for this, then the pitfalls can be disastrous.

 

Shortly after the repeal of the GS act, huge depository institutions entered some of the unregulated Over the Counter MBA, SIV and CDO markets.

 

What you are failing to understand, is that when these huge banks, with these massive amount of funds, like Citigroup for example, when they enter some of the unregulated markets, the amount of liquidity that is provided for subprime mortgages just to give an example, it fuels the fire of over speculation.

 

Think about it for a second. Wall Street is greedy by nature. The name of the game is to make as much money and as quickly as possible. Once you allow depository institutions to enter a game of profits through an unregulated market, Sh*t is going to happen. Every time!! It's just a matter of time before it will happen.

 

Now let me try to answer some of your questions. However, I will say that some of them don't seem to bear hardly any importance to our conversation, but none the less, I will try to answer them.

 

In regards to this question:

 

What is liquidity?

 

umm

 

Money

 

Money that is readily available. Assets that can be converted to money quickly. I'm not sure where you were headed with this question, because I'm pretty sure you know what this word means. I may have an idea of what you were referring to. The "liquidity" that I was referring to is the money that was provided by huge depository institutions and banks to fund many of these OTC derivatives that fueled the expansion of credit for sub prime mortgage lending. I hope you see that there is a direct correlation between the amount of money that was available before GS and after GS for sub prime mortgages.

 

In regards to this question:

 

Which risk was he (Greenspan) referring to?

 

Anyone who was studied Greenspan and been following him closely, knows that he will never fully admit his mistakes in detail.

For the sake of not putting words in his mouth, why don't we use his exact words and from there we can try to figure out what he meant.

 

http://www.cbsnews.com/stories/2008/10/23/...in4540592.shtml

 

Former Federal Reserve Chairman Alan Greenspan says the current financial crisis has uncovered a flaw in how the free market system works and that has shocked him.

 

Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proven to be wrong in the latest crisis.

 

Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

 

In his testimony, Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

 

 

Ok. Let's see here. He blamed the free market system. He said it was a mistake that banks would operate in their own self-interest, he saw a flaw in the model that he thought worked, and he blamed the heavy demand for securities that were backed by subprime mortgage investors.

 

GG. That's about as self explanatory as it gets. This is all about lack of regulation and the depository banks that entered and fueled sub prime lending.

 

In regards to this question:

 

Were FanFred covered by GS? If not, why bring them into the discussion?

 

Did GS govern banks' credit standards? If not, why bring them into the discussion?

 

that sort of like saying:

 

How does Steve in Boca Raton, Florida, not paying his mortgage payments and having his home forclosed on him, have anything to do with Joe from Detroit Michigan losing his job?

 

Directly they are not tied to one another. But, when you tie in the fact that in previous administrations, did everything they could to try to get people into homes, by applying pressure on the GSE's like Freddy and Fannie, there is a huge indirect correlation. GSE means Government Sponsored Enterprise btw. So to say they didn't have an influence on their lending practices would be very naive.

 

In regards to your question:

 

Did SIVs, CDOs & other securitizations exist before GS was repealed? If they did, why bring them into the discussion?

 

Yes, they did exist. But what you are failing to realize is how much these markets were expanded with the repeal of the GS. That is why I bring them into the discussion. The repeal of the GS allowed huge sources of money "liquidity" to enter the markets through these large depository institutions. If the GS act was still in place, Banks such as Citigroup would of not been able to have been a source of funding through the some of the unregulated MBS, (Subprime morgage) markets.

 

Without this source of funding, there would of been no where near as much fuel fo fan the flames of overspeculation in the housing markets.

 

It wasn't one single problem that brought the financial market crisis, but the GS act, in my view was the biggest contributor to the entire debacle.

[GG]

I enjoy a good debate. But in order to debate this properly, one has to understand what the whole underlying premise of the Glass-Steagall act. This is not intended to be a slight towards you GG, but I honestly don't believe you understand the concept of the GS . If you don't fully understand the GS act then it will be impossible for you to understand the ramifications of the repeal of the GS act.

 

... snipped

 

 

It wasn't one single problem that brought the financial market crisis, but the GS act, in my view was the biggest contributor to the entire debacle.

 

You do realize that of your 13 enumerated reasons for the debacle, not a single one is directly related to GS?

 

Again, the crisis was done in by non-bank firms and affiliates acting like banks to create a shadow banking system. It's actually the exact opposite of what GS was meant to prevent. The law was an anachronism long before its overdue demise, yet it keeps appearing in boogeyman theories of needing to find blame, when most of the time it's in the mirror.

 

Does the word Basel mean anything to you?

[Acantha]

It's almost funny watching someone else try to get into a decent discussion with GG. Well thought out posts with facts and plenty of information to back up an opinion, followed by an "nuh-uh".

 

Let it go Magox. It's not worth it.

[GG]

It's almost funny watching someone else try to get into a decent discussion with GG. Well thought out posts with facts and plenty of information to back up an opinion, followed by an "nuh-uh".

 

Let it go Magox. It's not worth it.

 

I agree with everything, except, the "well thought out" part. Yes, there was a lot of effort to put into an empty rebuttal.

 

But, if he is arguing that GS was the root cause of the crisis, then it would be helpful to see examples and data backing the claim.

 

Sorry, but saying that liquidity caused the crisis because the repeal of GS made the commercial banks the villains doesn't pass my test. Where are the hard facts, where is the data? Why did Bear, Lehman & AIG fail, but not JP Morgan or Wells? Did Wachovia fail because it was a bank or did it fail because it bought Golden West at the market peak? Did IndyMac fail because it issued securities it didn't understand, or did it fail because it had crappy underwriting?

 

When someone can answer these questions AND put them into context of how there was a direct connection to the repeal of Glass Steagall, them maybe I will give some slack. Otherwise they get lumped into the file of people who are good at regurgitating mass emails, without thinking through the issues.

[Acantha]

I agree with everything, except, the "well thought out" part. Yes, there was a lot of effort to put into an empty rebuttal.

 

But, if he is arguing that GS was the root cause of the crisis, then it would be helpful to see examples and data backing the claim.

 

Sorry, but saying that liquidity caused the crisis because the repeal of GS made the commercial banks the villains doesn't pass my test. Where are the hard facts, where is the data? Why did Bear, Lehman & AIG fail, but not JP Morgan or Wells? Did Wachovia fail because it was a bank or did it fail because it bought Golden West at the market peak? Did IndyMac fail because it issued securities it didn't understand, or did it fail because it had crappy underwriting?

 

When someone can answer these questions AND put them into context of how there was a direct connection to the repeal of Glass Steagall, them maybe I will give some slack. Otherwise they get lumped into the file of people who are good at regurgitating mass emails, without thinking through the issues.

But you don't even regurgitate emails. (BTW, large emails...say a couple hundered pages or so...that are bound and sold, those are called "books". They're good for recording history and explaining theories and/or facts. There's also "articles", but I don't want to confuse you) You ask random question after random question and challange people to prove thier points, but put absolutely no effort to prove your own....or even offer a point to begin with half the time. If his rebuttal is empty, why? Point out the reasons, don't just make a smart ass comment or ask a meaningless sarcastic question. What's the point of that? If he's wrong, why is he wrong? I'm not even saying he's right, as there's a lot of his argument I'm openly against, but if you won't even offer the same courtesy of coming up with facts and offering details to prove a point, why should he?

I get the fact that people start off not knowing any better, as I've been there myself, but why you expect anyone to continue to take any time to make a case, only to have you reply with nothing, is beyond me.

[Magox]

I agree with everything, except, the "well thought out" part. Yes, there was a lot of effort to put into an empty rebuttal.

 

But, if he is arguing that GS was the root cause of the crisis, then it would be helpful to see examples and data backing the claim.

 

Sorry, but saying that liquidity caused the crisis because the repeal of GS made the commercial banks the villains doesn't pass my test. Where are the hard facts, where is the data? Why did Bear, Lehman & AIG fail, but not JP Morgan or Wells? Did Wachovia fail because it was a bank or did it fail because it bought Golden West at the market peak? Did IndyMac fail because it issued securities it didn't understand, or did it fail because it had crappy underwriting?

 

When someone can answer these questions AND put them into context of how there was a direct connection to the repeal of Glass Steagall, them maybe I will give some slack. Otherwise they get lumped into the file of people who are good at regurgitating mass emails, without thinking through the issues.

Faustus, I appreciate the comment.

 

I will try to make this short and simple for GG since he wasn't able to understand my post.

 

Commercial depository banks like Citigroup for instance, these banks have a lot of money.

 

They weren't allowed to enter the unregulated OTC markets.

 

are you with me so far?

 

Repeal of Glass-Steagall act was signed into law in 1999 by Bill Clinton.

 

Shortly afterwards, and I'm just speaking facts here ok, Depository institutions like Citigroup entered the unregulated MBS, CDO and SIV markets. The MBS markets included subprime mortgage funding. Are you with me still?

 

The expansion of funding and liquidity for the subprime markets expanded at an enormous rate. Without the repeal of GS, funding for subprime mortgage lending would of been no where near as massive as it was.

 

That was an important part GG. I know I write alot about this and sometimes the meaning can get lost in the words. So read it again.

 

Not only that, but with the repeal of GS it allowed Depository institutions and banks, who should formost emphasize and practice risk management, it allowed these "responsable" institutions to enter the unregulated OTC markets.

 

That was the first big mistake. They should of never been able to enter the unregulated OTC markets, the repeal of the GS act allowed this to happen.

I can't be any more clear than that. GG, you either get it, or you don't.

 

My guess is that since you have all ready committed yourself mentally to not accepting this, you will still turn a blind eye to the reality of the facts.

 

Bottom line, if the repeal of GS would of never of occured, Citigroup, AIG, Lehman, Merrill, Bear Stearns would of never of had the exposure that they had to these markets. That is a fact GG. There is no denying that. No one can deny that.

 

Let me repeat. If the repeal of the GS act would of never occured, these financial institutions would still be around today, because they would of never of lost this sort of money through these MBS toxic investments. That is a fact.

 

AIG did not lose over $180 Billion last year because of bad underwriting practices or having to pay off insurance claims. They lost the vast majority of that money because they insured a massive amount of the CDO's, SIV's and MBS's.

 

In regards to Indymac, that is a different situation. They went under not so much because of their exposure to these markets, but because of their poor underwriting. They serviced loans that didn't pay them back. Totally different situation. Apples and Oranges

[GG]

But you don't even regurgitate emails. (BTW, large emails...say a couple hundered pages or so...that are bound and sold, those are called "books". They're good for recording history and explaining theories and/or facts. There's also "articles", but I don't want to confuse you) You ask random question after random question and challange people to prove thier points, but put absolutely no effort to prove your own....or even offer a point to begin with half the time. If his rebuttal is empty, why?

Point out the reasons, don't just make a smart ass comment or ask a meaningless sarcastic question. What's the point of that? If he's wrong, why is he wrong? I'm not even saying he's right, as there's a lot of his argument I'm openly against, but if you won't even offer the same courtesy of coming up with facts and offering details to prove a point, why should he?

I get the fact that people start off not knowing any better, as I've been there myself, but why you expect anyone to continue to take any time to make a case, only to have you reply with nothing, is beyond me.

 

Except it's not how the debates work. If someone wishes to pontificate about a topic, they should also withstand questions. I don't need to help him out if he can't answer the questions. If I make a point and someones asks for detail, I provide it.

 

Sorry that you don't appreciate my responses, especially since you've been on the wrong end of many. But, if you can't answer questions, don't expect me to make your point for you.

 

If you know a topic no matter whether you're regurgitating a mass email or a book written by a quack, you should be able to defend it from snarky sarcastic know-nothings on an Internet forum.

[GG]

Faustus, I appreciate the comment.

 

I will try to make this short and simple for GG since he wasn't able to understand my post.

 

Commercial depository banks like Citigroup for instance, these banks have a lot of money.

 

They weren't allowed to enter the unregulated OTC markets.

 

are you with me so far?

 

Repeal of Glass-Steagall act was signed into law in 1999 by Bill Clinton.

 

Shortly afterwards, and I'm just speaking facts here ok, Depository institutions like Citigroup entered the unregulated MBS, CDO and SIV markets. The MBS markets included subprime mortgage funding. Are you with me still?

 

The expansion of funding and liquidity for the subprime markets expanded at an enormous rate. Without the repeal of GS, funding for subprime mortgage lending would of been no where near as massive as it was.

 

That was an important part GG. I know I write alot about this and sometimes the meaning can get lost in the words. So read it again.

 

Not only that, but with the repeal of GS it allowed Depository institutions and banks, who should formost emphasize and practice risk management, it allowed these "responsable" institutions to enter the unregulated OTC markets.

 

That was the first big mistake. They should of never been able to enter the unregulated OTC markets, the repeal of the GS act allowed this to happen.

I can't be any more clear than that. GG, you either get it, or you don't.

 

My guess is that since you have all ready committed yourself mentally to not accepting this, you will still turn a blind eye to the reality of the facts.

 

Bottom line, if the repeal of GS would of never of occured, Citigroup, AIG, Lehman, Merrill, Bear Stearns would of never of had the exposure that they had to these markets. That is a fact GG. There is no denying that. No one can deny that.

 

Let me repeat. If the repeal of the GS act would of never occured, these financial institutions would still be around today, because they would of never of lost this sort of money through these MBS toxic investments. That is a fact.

 

AIG did not lose over $180 Billion last year because of bad underwriting practices or having to pay off insurance claims. They lost the vast majority of that money because they insured a massive amount of the CDO's, SIV's and MBS's.

 

In regards to Indymac, that is a different situation. They went under not so much because of their exposure to these markets, but because of their poor underwriting. They serviced loans that didn't pay them back. Totally different situation. Apples and Oranges

 

I certainly appreciate the simplicity, as I'm working my way through this debacle.

 

You sure are fond of using acronysms. What exactly is an unregulated OTC market? How exactly did AIG insure a massive amount of the CDO's, SIV's and MBS's? And if they did, why did the firm collapse a day after Lehman failed and not when the RMBS market collapsed in the summer of 2007? And of course, what does any of this have to do with Glass Steagall?

[KD in CA]

Some good discussion here. No need to get pissy though...

 

There is plenty of blame to go around.

 

1) The Federal Reserve played a large role in this. Greenspan slashed interest rates and kept them down for too long, which made credit very cheap

 

2) Home buyers and their greediness, who took advantage of the cheap credit, which helped to create a huge demand for houses, therefore bidding up home prices.

 

3) Real Estate agents who worked for the people selling homes rather than the buyer, getting the higher commissions.

 

4) The Clinton Administration, who repealed the Glass-Steagall act and also pushed for less stringent credit and down payment requirements through Freddy and Fannie.

 

5) Mortgage brokers who dealt in these "exotic" predatory loans (subprime and interest only).

 

6) Alan Greenspan for pushing the repeal of the GS act going as far back as the early to mid 80's.

 

7) Alan Greenspan once again for his lack of forsight in miscalculating risk and the effects of a model that he never thought would be broken

 

8) Alan Greenspan again, for encouraging Americans to take out adjustable mortgages.

 

9) Wall Street Firms and their greed, who bundled the Mortgage Backed securities (MBS) and issued bonds using these securities as collateral.

 

10) The Bush Administration for lack of oversight and pushing deregulation.

 

11) Using mark-market accounting which had the effect of making the assets less on paper, than in the real market. (mark-market accounting also allowed companies like Enron to manipulate and distort future earnings based on false and overly optimistic profit models that were never realized. This is how mark-market accounting can be used deceptively in the opposite spectrum)

 

12) The U.S as a whole, our arrogance, how we thought this balloon would never burst, no matter how high it went or how fast.

 

13) The lack of investigative reporting, and mainly reporting the upside and how things will go on and on, (CNBC).

 

All valid reasons here. Naturally, the media has only ever reported on #5, 9 & 10.

[GG]

Some good discussion here. No need to get pissy though...

 

 

 

All valid reasons here. Naturally, the media has only ever reported on #5, 9 & 10.

 

Yes, but none have anything to do with the repeal of Glass Steagall.

 

Yeah I'm getting pissiy because people repeating fallacies make them true in many people's eyes.

 

Glass Steagall was a stupid law that never accomplished what it was meant to accomplish. Banks could do whatever they wanted a full decade before the law was formally extinct.

[The Poojer]

Do you have facts to back that up?

 

Glass Steagall was a stupid law that never accomplished what it was meant to accomplish. Banks could do whatever they wanted a full decade before the law was formally extinct.

 

 

Yeah I'm getting pissiy because people repeating fallacies make them true in many people's eyes.

[Magox]

I certainly appreciate the simplicity, as I'm working my way through this debacle.

 

You sure are fond of using acronysms. What exactly is an unregulated OTC market? How exactly did AIG insure a massive amount of the CDO's, SIV's and MBS's? And if they did, why did the firm collapse a day after Lehman failed and not when the RMBS market collapsed in the summer of 2007? And of course, what does any of this have to do with Glass Steagall?

OTC is Over The Counter. Over The Counter is a decentralized market of securities not listed on an exchange where market participants trade over the telephone, fax or even emails instead of a physical trading floor. There is no central exchange or meeting place for this market. It's normally a transaction between 2 parties, Basically very little regulation and in some cases no regulation.

 

AIG not only insures physical assets, but they insured alot of these other financial instruments.

 

Let me give you a link to an article. Maybe this article will help you believe what I am saying.

 

here is the link http://online.wsj.com/article/SB122887203792493481.html

 

I will copy most of the article below. It's from the WSJ. They are pretty reliable. here goes:

 

 

American International Group Inc. owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan.

 

The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm's near-collapse in September. In the past, AIG has said that its trades involved helping financial institutions and counterparties insure their securities holdings. The speculative trades, engineered by the insurer's financial-products unit, represent the first sign that AIG may have been gambling with its own capital.

The soured trades and the amount lost on them haven't been explicitly detailed before. In a recent quarterly filing, AIG does note exposure to speculative bets without going into detail. An AIG spokesman characterizes the trades not as speculative bets but as "credit protection instruments." He said that exposure has been fully disclosed and amounts to less than $10 billion of AIG's $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30.

 

AIG's financial-products unit, operating more like a Wall Street trading firm than a conservative insurer selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company's money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt. AIG now finds itself in a position of having to raise funds to pay off its partners.

 

The fresh $10 billion bill is particularly challenging because the terms of the current $150 billion rescue package for AIG don't cover those debts. The structure of the soured deals raises questions about how the insurer will raise the funds to pay the debts. The Federal Reserve, which lent AIG billions of dollars to stay afloat, has no immediate plans to help AIG pay off the speculative trades.

 

The outstanding $10 billion bill is in addition to the tens of billions of taxpayer money that AIG has paid out over the past 16 months in collateral to Goldman Sachs Group Inc. and other trading partners on trades called credit-default swaps. These instruments required AIG to insure trading partners, known on Wall Street as counterparties, against any losses in their holdings of securities backed by pools of mortgages and other assets. With the value of those mortgage holdings plunging in the past year and increasing the risk of default, AIG has been required to put up additional collateral -- often cash payments.

 

AIG's problem: The rescue plan calls for a company funded largely by the Federal Reserve to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG had written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt, and AIG now finds itself in a position of having to raise funds to pay off its partners because those assets have fallen significantly in value.

The Fed first stepped in to rescue AIG in mid-September with an $85 billion loan when the collateral demands from banks and losses from other investments threatened to send the firm into bankruptcy court. A bankruptcy filing would have created losses and problems for financial institutions and policyholders all over the world that were relying AIG to insure them against the unexpected.

 

By November, AIG had used up a large chunk of the government money it had borrowed to meet counterparties' collateral calls and began to look like it would have difficulty repaying the loan. On Nov. 10 the government stepped in again with a revised bailout package. This time, the Treasury said it would pump $40 billion of capital into AIG in exchange for interest payments and proceeds of any asset sales, while the Fed agreed to lend as much as $30 billion to finance the purchases of AIG-insured CDOs at market prices.

 

The $10 billion in other IOUs stems from market wagers that weren't contracts to protect securities held by banks or other investors against default. Rather, they are from AIG's exposures to speculative investments, which were essentially bets on the performance of bundles of derivatives linked to subprime mortgages, commercial real-estate bonds and corporate bonds.

These bets aren't covered by the pool to buy troubled securities, and many of these bets have lost value during the past few weeks, triggering more collateral calls from its counterparties. Some of AIG's speculative bets were tied to a group of collateralized debt obligations named "Abacus," created by Goldman Sachs.

 

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Getty ImagesThe Abacus deals were investment portfolios designed to track the values of derivatives linked to billions of dollars in residential mortgage debt. In what amounted to a side bet on the value of these holdings, AIG agreed to pay Goldman if the mortgage debt declined in value and would receive money if it rose.

 

As part of the revamped bailout package, the Fed and AIG formed a new company, Maiden Lane III, to purchase CDOs with a principal value of $65 billion on which AIG had written credit-default-swap protection. These CDOs currently are worth less than half their original values and had been responsible for the bulk of AIG's troubles and collateral payments through early November.

 

Fed officials believed that purchasing the underlying securities from AIG's counterparties would relieve the insurer of the financial stress if it had to continue making collateral payments. The plan has resulted in banks in North America and Europe emerging as winners: They have kept the collateral they previously received from AIG and received the rest of the securities' value in the form of cash from Maiden Lane III.

 

The government's rescue of AIG helped prevent many of its policyholders and counterparties from incurring immediate losses on those traditional insurance contracts. It also has been a double boon to banks and financial institutions that specifically bought protection on now shaky mortgage securities and are effectively being made whole on those positions by AIG and the Federal Reserve.

 

Some $19 billion of those payouts were made to two dozen counterparties just between the time AIG first received federal government assistance in mid-September and early November when the government had to step in again, according to a confidential document and people familiar with the matter. Nearly three-quarters of that went to French bank Société Générale SA, Goldman, Deutsche Bank AG, Crédit Agricole SA's Calyon investment-banking unit, and Merrill Lynch & Co. Société Générale, Calyon and Merrill declined to comment. A Goldman spokesman says the firm's exposure to AIG is "immaterial" and its positions are supported by collateral.

[GG]

You see Faustus, this is exactly what I mean. Now, the debate has moved from regurgitating emails to plain reposts of newspaper articles, without any context of what they mean. I doubt that Magox understands what the article means either, because it has nothing to do with AIG insuring a massive amount of the CDO's, SIV's and MBS's.

 

Hint, the article talks about a bad trade that blew up on AIG Financial Products, maybe a bit similar to other bad deals that AIG FP did that blew up in its face.

 

Can't wait until the next article.

[GG]

Do you have facts to back that up?

 

Yup. Look at the repeal of the bank company holding act which allowed cross state mergers, along with allowing banks to set up securities subsidiaries as long as they weren't part of the bank, and they weren't allowed to have a "k" in the bank. (True). The GS laws also didn't prevent banks from having their own trading operations, nor advising major corporate clients. The only real teeth that GS had was disallowing traditional brokerage operations to be run out of a bank to protect the bank and individual investors. Too bad, none of those protections had anything to do with the root causes and eventuality of the credit crisis.

 

Basel, did however.

[DC Tom]

You see Faustus, this is exactly what I mean. Now, the debate has moved from regurgitating emails to plain reposts of newspaper articles, without any context of what they mean. I doubt that Magox understands what the article means either, because it has nothing to do with AIG insuring a massive amount of the CDO's, SIV's and MBS's.

 

Hint, the article talks about a bad trade that blew up on AIG Financial Products, maybe a bit similar to other bad deals that AIG FP did that blew up in its face.

 

Can't wait until the next article.

 

At least now you know what the OTC market is. He sure showed you.

[Magox]

You see Faustus, this is exactly what I mean. Now, the debate has moved from regurgitating emails to plain reposts of newspaper articles, without any context of what they mean. I doubt that Magox understands what the article means either, because it has nothing to do with AIG insuring a massive amount of the CDO's, SIV's and MBS's.

 

Hint, the article talks about a bad trade that blew up on AIG Financial Products, maybe a bit similar to other bad deals that AIG FP did that blew up in its face.

 

Can't wait until the next article.

You are truly blind.

 

I completely understand what I write. You on the other hand, don't.

 

Did you just say that the AIG had nothing to do with insuring massive amounts of CDO's and MBS's?

 

Really?

 

AIG's financial-products unit, operating more like a Wall Street trading firm than a conservative insurer selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company's money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt

 

notice how they used the word "bets" that is plural btw.

 

 

AIG's problem: The rescue plan calls for a company funded largely by the Federal Reserve to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG had written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt

 

"troubled CDO securities"

 

hmm, I thought you said it had nothing to do with CDO's.

 

Keep turning a blind eye. You don't provide any information, and why? because you can't back it up. Instead, all you do, is make snyde remarks and ask anecdotal questions that don't mean anything.

 

I just provided you an article from the WSJ and you basically said that the article stated a bad trade that blew up from AIG Financial products.

 

Really? why don't you read it again, it clearly does not talk about one bad trade. Your reading comprehension skills are lacking my friend.

 

Read it again, and tell me that they were talking about one bad trade.

 

Read it again, and tell me that it had nothing to do with CDO's and MBS's.

 

It's difficult to have a debate with you, because you ignore facts. This is not speculative information that I am bringing up. These are facts.

 

Faustus was right. No point in debating with someone who has nothing constructive to offer.

[GG]

You are truly blind.

 

I completely understand what I write. You on the other hand, don't.

 

Did you just say that the AIG had nothing to do with insuring massive amounts of CDO's and MBS's?

 

Really?

 

I may be blind, but I know better that if somebody asked me about the reasons why AIG blew up, I wouldn't offer up an article describing what happened at the company after it blew up as proof of whatever I'm blabbering about.

 

And no, I didn't just say that the AIG had nothing to do with insuring massive amounts of CDO's and MBS's. It shouldn't be hard to read what I wrote. It's only a few posts above.

[Magox]

I may be blind, but I know better that if somebody asked me about the reasons why AIG blew up, I wouldn't offer up an article describing what happened at the company after it blew up as proof of whatever I'm blabbering about.

 

And no, I didn't just say that the AIG had nothing to do with insuring massive amounts of CDO's and MBS's. It shouldn't be hard to read what I wrote. It's only a few posts above.

umm

 

yes you did say that AIG had nothing to do with insuring those derivatives. Here's what you wrote : I doubt that Magox understands what the article means either, because it has nothing to do with AIG insuring a massive amount of the CDO's, SIV's and MBS's.

 

The reason why I posted the article is because you were not believing what I said. So I brought up a credible news source, who reported on part of the AIG debacle.

 

I've answered and proved you wrong on just about every point. The only thing you have to offer are inconsequential questions in an attempt to be snyde and undermine my knowledge, stating that I am blabbering details by posting factual articles to back my point, also making assumptions that I regurgitate emails and post them here, state that you doubt my knowledge of what I am reading, and accusing me of posting fallacies.

 

I am not a conspiracy theorist what so ever. I don't subscribe to that Tax Tea Party crap, Ted Butler conspiracy theories or any radical movement that involves things that I can't touch, feel or see.

 

So your assumption that I am a part of all this is exactly that, just an assumption.

 

I work with the financial markets, that is what I do for a living. I just happen to have a deep passion for what I do and I care very deeply for the clients that I have. I have never mislead a customer, and I never will. What I provided to you is factual investigative articles, not speculative fodder.

 

Sure, we can debate on whether or not GS was the single biggest factor, and yes that is debatable. But it is factual, to say that the exposure to these non regulated financial instruments would of been much much less, and we wouldn't of had to spend trillions of dollars from both the Treasury and the Federal Reserve if GS was never repealed. That is a fact.

 

I suggest you study up on GS before you make any further comments regarding this topic, because all it does is make you look uninformed.

 

My guess is that you are a leftist apologist. By the tone of your argument, which are backed up by nothing btw, you seem to take a offense that the repeal of GS is the democrats fault. I wasn't trying to make this a political conversation, but my guess is that this is the root of your ignorance on this topic. You automatically are defending the Clinton administration by insinuating that the repeal of GS was not the root cause. I may be wrong about your political agenda, but I am just going on a hunch based on your tone.

 

I am only pointing out facts. The repeal did happen under Clinton's watch, Greenspan did push for it, and the Bush administration pushed for deregulation of the markets. Paulson was appointed during Bush's watch, and Paulson was a very smart Wall Street man, who's economic model was broken, therefore making him blind to the risks of the non regulated MBS markets.

 

There are many people to blame. My argument is that the repeal of the GS act made things 100 times worse then what they were.