It wasn’t the loans per se. The banks tried to protect themselves against defaults for the lowest cost, and to do that, they bought Credit Default Swaps from companies like AIG.
However, the CDS instruments were never regulated and AIG was not required to have enough capital to cover the policies in case of massive numbers of borrowers defaulting. No one thought that would ever happen.
Eliot Spitzer (the same idiot who had to resign later from the governorship of NY after he was caught with hookers) forced CEO Hank Greenberg out of AIG, and then the company went nuts with these policies.
As you probably know, AIG is being propped up by government loans. No telling if they will face any criminal prosecution.
CDS fraud is apparently in the trillions of dollars because they were written into the accounts as assets. They let the banks and brokerage houses lend even more money on high-return loans. The banks don’t have these CDS instruments on their books any more and are very reluctant to loan money to others, because the subprime “assets” are bundled as securities and will have to be unbundled, an extremely laborious process.
Read this article about Joseph Cassano and his infamous credit swaps.
http://www.portfolio.com/news-markets/top-5/2008/09/28/AIGs-Derivatives-Run-Amok
What a mess!
Great link. Thanks
CDS fraud is apparently in the trillions of dollars because they were written into the accounts as assets.
Just to add, that because they were treated as assets on the books, it allowed the institutions (like AIG or any SIV funds) to compound overall leverage on these "assets" even further, to inflate their profitability. As you pointed out, no thought was given to the [fixed] liabilities on the balance sheet, as long as the [real estate] assets kept inflating. In many ways they were not that different from many "flippers" who bought the homes at ridiculous prices only to sell it to the "greater fool".
Maurice "Hank" Greenberg himself lost over $6B just since May in the collapse of company he spent 35 years building, and he was not even in a position to know the real damage caused to AIG by new management in the 3 years of his absence, forced out by Spitzer's vindictive corporate blackmail of public financial firms. By the time he unsuccessfully tried to retake control and management of the company, the damage was already done and it was already too late to save the company, let alone the market.
The Timeline Project / Link List of Bailout History
http://www.freerepublic.com/focus/f-bloggers/2093845/posts
One of my latest posts there:
Five Million Illegal Aliens get Fraudulent Loans?
Near top of a google list, Newsbusters:
headline: Calling the Old Media: Five Million Illegals Have Illegal Mortgages in U.S.A.!
Here are some snippets:
” ... One illegal alien was arrested this year in Tucson after allegedly using a stolen social security number to buy two homes and rack up over $780,000 in bad debt. ...”
” ... It’s not known how many of those have contributed to the subprime housing mortgagemeltdown, but it has affected every state, including Arizona. ...”
One FR link in which HUD denies the charge:
HUD cries foul over illegal immigrant mortgage data
http://www.freerepublic.com/focus/f-news/2101844/posts
Oldexpat posted: Whether it is 1m or 5m is irrelevant. No bank should have been giving mortgages to someone who could be deported any day. Makes no sense. All I know is we have a friend foreclosing on almost one house a day in Orange Co. CA.
Related link:
HUD Mum on Illegal Mortgages
http://www.freerepublic.com/focus/f-news/2103625/posts