Posted on 03/17/2009 2:45:53 PM PDT by SeekAndFind
So what is the basis for saying that the architects of AIG's collapse should be rewarded for helping wreck their employer and damaging the world economy?
This problem, ALL of this problem, was caused by the Democrat Party insisting that everyone with a pulse deserved a mortgage.
This injected risk into the system.
Insurance was used as a way to manage risk, however the risk was simply too great to manage.
Go to the SOURCE: Mortgage Origination!
Precisely.
The REAL issue was the taxpayer funded ‘bailouts’ themselves. This is just a diversionary tactic.
Why would, for example, a European bank buy a security based on mortgages in the US, a market they knew little about? Simple: the payments promised by the security were insured by AIG. Without such insurance, those mortgage backed securities would not have been marketable and the US loan bubble would have deflated early on.
You sound like you are trying to avoid placing the blame on the bad loans, where the blame truly belongs.
First of all, what experience did ANYONE have in the area of insurance on sub prime mortgages? The answer, of course, is that there is NO actuarial experience. Congress CREATED this risk, and then the financial services industry tried to come up with ways to DEAL with the risk. Hard to do, compared to corporate and municipal debt, since individual credit ratings are protected, confidential, private information.
Next, it was originally thought, by the government, that we would set up a “toxic bank” of some sort to absorb the bad debt. Very hard to do, since the bad debt is now diversified with the good debt. We do not know how to tell the loans apart until the defaults pop up.
Tell me: What practical difference is there, in the END RESULT, between the government “buying up” the bad debt, or the government simply funding the mortgage insurance on that debt?
It would be dumb for the government to buy up bad debt, directly, if there was insurance on that debt. This, of course, was the original plan but that plan made little sense, when the insurance issue was raised.
Also
Foreign governments ASSUMED that Fannie and Freddie had the FULL FAITH AND CREDIT of the US government.
That is why foreign governments purchased so much of our mortgage debt.
The Democrats who ran and controlled Fannie and Freddie did nothing to discourage foreign investors, on this point.
Just because there is a risk created by government policies does not mean that an insurance company must write policies for that risk. Indeed, basic underwriting principles hold that a lack of knowledge about a risk requires that a company not write a policies to cover it.
As it happens, there was head scratching in the European financial press when AIG wrote insurance for mortgage CDOs. Why would they do it? The crew that wrote the insurance was being lavishly paid and generated fat premiums. They wrecked AIG, leaving the US taxpayer to pay the bill and pay for extravagant bonuses to those responsible.
On the whole, US and foreign institutional investors, not foreign governments, purchased US mortgage backed CDOs. Insurance from AIG was required because it guaranteed a steady income flow and the value of the CDO, something that even the implicit US government guarantees of Fannie and Freddie mortgages could not assure.
Again
The government required the bad loans to be made in the first place.
What happened after the fact was not good at all, but -— it never would have happened without the government mandate to write risky loans.
Instead, what happened was that Fannie, Freddie, and various private lenders issued mortgage backed securities backed by insurance from AIG. Those CDOs were then sold to US and European investors, thus keeping the US mortgage game going for years more and setting the world up for a systemic financial crisis.
That is the difference that AIG insurance made. So why should those who designed and sold that insurance and wrecked their company and the economy get hundreds of millions in bonuses? On full investigation, some of them may even end up jail.
Actually, what AIG did was not really insurance in the strict sense, it was more like an “option” on a security.
There were no insurance reserves. The “premium” went right to the bottom line of AIG.
Yes, it was stupid, but bad business decisions are made every day. Very few bad business decisions are truly criminal.
Besides, your sense of “justice” would violate contract law, Constitutional Law and common sense.
AIG did NOT go bankrupt. Contracts must therefore be honored.
Furthermore, Chris Dodd wrote a FURTHER guarantee, of the bonus structure, into a law that was passed by Congress and signed by the President.
You do not have to like it, but that has no bearing at all on the law.
It would be a terrible blow to contract law, and a death blow to capitalism, to allow Congress and the President to break private contracts.
Mail fraud, wire fraud, and securities fraud provide wide scope for prosecutors. Find fraud in some respect and it is likely subject to criminal prosecution. Was there fraud by AIG employees? Have the FBI and a federal grand jury investigate to find out.
Let me make clear that most parts of AIG were well run by loyal and honest employees. Some of them got bonuses. Pay those bonuses. Go after the bad employees and try to claw back what they were paid.
If an agent wrote a TON of insurance on homes in San Francisco -—
If that volume of business would qualify for a bonus -—
If San Francisco was then COMPLETEY DESTROYED, by an Earthquake -—
Should that agent be denied his bonus?
NO!
Back to the insurance model: The agent is rewarded based on sales -— the UNDERWRITER is responsible for risk.
Now, I admit, the mortgage “insurance” was run out of London for a reason: it was never really, truly, “Insurance” but instead a corporate guarantee.
Still, you are painting with a broad brush here, and you should resist the populist urge to “do something” as the cure will be far worse than the disease.
“Hard cases make bad law”!
Or, to borrow your example, although the earthquake was inevitable, the employees wrote insurance policies on unsound structures.
In either case, if company superiors were deceived about the risk, there is not just malfeasance but fraud, potentially criminal fraud. Send in the G-Men to find out.
>>>> The REAL issue was the taxpayer funded ‘bailouts’ themselves. This is just a diversionary tactic. <<<<
Yes. Exactly and precisely correct.
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ter⋅ror⋅ist /ˈtɛrərɪst/ [ter-er-ist]
–noun 1. a person, usually a member of a group, who uses or advocates terrorism. 2. a person who terrorizes or frightens others. 3. (formerly) a member of a political group in Russia aiming at the demoralization of the government by terror. 4. an agent or partisan of the revolutionary tribunal during the Reign of Terror in France. 5. American International Group
Forget al-Qaida - the world's most successful terrorist organization, by a margin of roughly $170 billion dollars, exists right here in the U.S... in fact we will make it easy for the FBI - its terrorist boot camp is located at 70 Pine Street, New York, NY 10270, and they even answer the phone at 212-770-7000. The organization in question, is of course, known as American International Group. And while the U.S. has claimed it will not negotiate with any ad hoc or designated terrorist organization ever, it has time after time succumbed to every single whim and demand that AIG has raised, from shelving out hard-earned taxpayer money to make sure the company does not disappear in the gravitational vortex of its derivatives Frankenstein, to protecting its cabal of crony amateur terrorists in waiting (read CDS counterparties who benefited from every bailout, for a complete list see here), to its employees who mindnumbingly keep receiving bonus after bonus payment. And if America was any country in Europe, with a touchy-feely sense of ethical propritery, this article in the New York Times would have resulted in mass looting.
As the MSM disclosed a few days ago, Geithner, in a horrendous attempt to play Robin Hood for the masses pressured AIG to cut the $9.6 million its top 50 executives were going to receive. While that bit of information was purposefully circulated, the salvo that came from the NY Times was a bit of a fly in Geithner's ointment. Turns out AIG is paying out $165 million in "retention" bonuses over the next few days, with a range of as little as $1,000 to as much as $6.5 million for some lucky terrorist, and seven additional executives receiving bonuses more than $3 million. Now the logic for why these bonuses can not be reversed is that they were promised at some point last year, and AIG (aka US taxpayers) is contractually and legally bound to satisfy them.
This development has made some new and even more toothless Robin Hoods appear on stage center, among them Obama's chief economic advisor Larry Summers, claiming the bonus situation at AIG "is outrageous. The whole situation at AIG is outrageous. What taxpayers are being forced to do is outrageous" however "We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system." Other politicians taking the populist flag for a spin include Republican Mitch McConnell who said:
“If you’re going to take the government as a partner, the message here, I’m afraid, to any business out there that’s thinking about taking government money, is “Let’s enter into a bunch of contracts real quick, and we’ll have the taxpayers pay bonuses to our employees." For them to simply sit there and blame it on the previous administration or claim contract — we all know that contracts are valid in this country, but they need to be looked at. Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees? Particularly employees who got them into this mess in the first place. I think it’s an outrage."
Of course, none of this would have been necessary had the government done the right thing and put this bankrupt company where it belongs: into a controlled, pre-packaged or otherwise bankruptcy. Under bankruptcy law, not only would existing bonus contracts be renegotiable, but even historical bonuses would be subject to 3 year clawbacks under the terms of fraudulent conveyance. But of course, this would never happen as that would mean someone in the administration would have to make the right decision.
Which leads us to another question. As everyone now knows, the reason AIG is in its current state is due almost exclusively to the hubris of one Joseph Cassano, who would have spared the world a lot of pain if he had only read one or two of Nassim Taleb's books over the past decade realizing what 6 sigma events are and how it is in fact possible to lose up to $500 billion dollars in derivative trades. A cursory google search reveals that Cassano is a big Obama-Dodd fan (the later of DPA 2009 fame). Maybe while we are on the whole topic of fraudulent conveyance, it would be prudent for the President and the Chairman of the Senate Banking Committee to refund the over $8,900 that the individual at the core of AIG's CDS black hole had so generously provided to them in 2008... as otherwise it just might seem that he, along with his former organization, are getting some sort of preferential treatment... I am not suggesting that is the case at all, merely referring to the optics and the fact that many people are looking for pitchforks in their toolsheds. And while they are refunding Cassano's highly suspect generosity, they may also want to consider refunding the campaign contributions of Cassano's wife, Ellen Hooker as well, which came to $4,400 in 2008, and was targeted at the same two recipients. After all, we are talking about fraudulent conveyance here.
Now Cassano seems like a prudent man: he does not live in Madoff-type grandeur: his house, at 32 Minute Man Hill in Westport, CT was only evaluated at $1.2 million in 2007 (granted I have no idea of his environs in his London town house located behind luxury store Harrod's). Indeed, not only prudent, but generous: Cassano and wife apparently have a penchant for donating taxpayer money to worthy causes (his passion for all things Brooklyn is likely explained by the fact that the man who ran and subsequently destroyed the world of finance is a graduate of Brooklyn College). What confuses me, is how Cassano had a job in the first place. Taking a look at his Finra brokercheck report reveals that way before the hoopla of 2007-2008, Cassano already was in deep water with the regulators. 2004 allegations filed against Cassano, which were subsequently swept under the rug via an $80 million settlement between AIG and the SEC/DOJ, contained some serious charges:
The complaint alleged that AIG-FP PAGIC [Cassano's group] violated federal securities laws by aiding and abetting securities law violations by a public company, PNC Financial Services Group Inc. ("PNC"), in connection with a transaction entered into in 2001 with PNC that was intended to enable PNC to remove certain assets from its balance sheet. The complaint alleged that AIG-FP PAGIC knew, or was deliberately ignorant in not knowing, that the PNC transaction did not satisfy the requirements of GAAP for non-consolidation of special purpose entities.
After the $80 million settlement, the complaint was dismissed "with prejudice after the DOJ and SEC agreed not to prosecute AIG or AIG-FP in connection with the PNC transactions." Hillariously, again like in the Madoff debacle, the ultimate guilty party may again end up being the SEC. And while the Madoff fallout impacted a bunch of high net worth individuals, the SEC's light treatment of Cassano's infraction resulted in the collapse of the financial system. Yet somehow, none of the individuals who are responsible for Madoff's and Cassano's $600 billion in combined losses (and the financial system's utter collapse) are behind bars...
Maybe the American public, with its infinite patience, deserves such terrorists as AIG demanding and getting whatever they want whenever they want. One thing is certain: the SEC, while going after $20 million ponzis in Arkansas and Montana, is likely currently slapping the next Joseph Cassano on the wrist with some harsh language and a token fine, as the latter prepares to once and for all wipe out whatever is left of capitalism.
What Cooked the World's Economy?
It wasn't your overdue mortgage.
By James Lieber
Village Voice
January 28, 2009
Before I even look at the leftist rag views that you have posted -—
Look at the TITLE! Can you POSSIBLE construct for me how ANY of this financial mess would happen, had not Congress, and the Democrats forced lenders to make risky loans?
You can't!
The Communists at Village Voice CAN'T!
You are attacking the symptoms, and not the cause!
Credit Default Swaps, CMO’s and all the other derivatives came into being in order to DEAL with the debt that DEMOCRATS created and promoted!
Stop the bad loans, or at least, stop bad loans from entering into the securities market, and you will solve the problem!
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