AIG is in trouble mainly because it wrote insurance policies on mortgage derivatives and mortgage securities. In good times, that's like minting your own money. In bad times, well, no need to explain that.
Q4 GDP for America was revised down from minus 3.8% to minus 6.2%. The annualized rates in Japan, Germany, France, England, and Italy are all worse than the USA.
Fannie Mae and Freddie Mac have a combined loss of $1 trillion. Their losses come almost exclusively from actual mortgages, not from derivatives. Fannie and Freddie hold about two thirds of all bad USA mortgages.
Although home prices nationally have fallen in the 5%-10% range, the prices on sub-prime homes that have gone into foreclosure have fallen in the 20%-30% range. Between 2004-2007, about 25% of all new mortgages were sub-prime, so that is a very big deal.
The author does make one very good point.
How did all this happen?
I read about this crisis in detail, every day, and I still don't understand it.
It seems to me if the US Treasury had stepped forward early in the crisis and promised to purchase every bad mortgage at face value, the crisis would have ended instantly.
If the mortgage is guaranteed, there can be no insurance loss, and there can be no confusion about the value of the derivatives.
The total loss would have been in the range of $1.5 trillion.
In retrospect, $1.5 trillion would have been a bargain.
I agree for the most part - $1.5 trillion does look like a bargain now.
What happened is that these mortgages were “sold” repeatedly - worthless mortgages, made oftentimes to people who had no realistic chance of repaying these loans, but nobody cared as everyone was making money on the deals. Then the music stopped and the game of musical chairs came to an end. Whoever was left holding the bag became liable for the debt.
The only rational I can come up with (besides total corruption, greed or worse) is that the industry as a whole thought that if there were massive defaults, it wouldn’t matter, as the housing prices would continue to increase and they would still have the value of the “assets”.
That would have still left about 14 million empty housing units on the market. The major cause of this whole mess was the changes in the law made by the republicans and the midnight credit default swaps. Total world derivatives are around 550 to 660 trillion.
The treasurer could have bought all the defaulted mortgages for about 10% of the tarp. But then the government would not have been able to say we are helping the people.
They are hiding behind mortgages for a rich banker wall street bailout.
A bargan yes, but where did the money go?
Yes, the market value of assets (houses) has plunged but somebody got paid for the houses. Where did the money go?
In the equities, paper gains have become paper losses and lost opportunity to convert to cash....that is understandable but where did the money for the houses and “stuff” go? Somebody got paid.
As for financial markets...the value is never really value until converted to cash and even then, with fiat currency, the value is suspect.
bttt