Posted on 03/19/2009 6:00:56 AM PDT by governsleastgovernsbest
Excellent post, follow up later. I have thought for months that Spitzer got Hank Greenberg out for nefarious reasons.
I very much want to learn other FReeper’s thoughts on the big picture encompassing at least 10 years rather than the just todays spike on timeline.
Here’s a terrific white paper about how Fannie and Freddie were used as piggy banks/spending troughs by the congress:
http://www.aei.org/publications/pubID.28704/pub_detail.asp
The Last Trillion-Dollar Commitment:
The Destruction of Fannie Mae and Freddie Mac
Here’s another article by Doug Ross:
http://directorblue.blogspot.com/2008/09/testimony-that-will-have-you-pulling.html
The Fannie Mae testimony that will make you scream in anger
Here’s another article:
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities
Finally, here is my concise (?) version of what happened:
FReeper pleikumud posted this paragraph today:
“Beginning in 1992 Congress pushed Fannie Mae and Freddie Mac to increase purchases of mortgages going to low to moderate income people. In 1996 HUD gave Fannie and Freddie an explicit target: 42% of their mortgage financing had to go to borrowers with incomes below the median. This target was increased to 50% in 2000 and 52% in 2005. In 1996 HUD required that 12% of all mortgages purchased by Freddie and Fannie had to be “special affordable” loans, meaning loans to borrowers with income less than 60% of their area’s median. The 12% dictum was increased to 20% in 2000 and 22% in 2005.”
Here’s what I’ve been saying:
Clinton enlarged the Community Reinvestment Act and gave it iron teeth in the 1990s. Banks were forced to give bad loans to “underserved” populations in “redlined” areas. This was reaction to an old story that the media had wailed about for years. ACORN and other groups were authorized to mau-mau banks to force them to make bad loans, even invading meetings and picketing in the bank lobby.
The passage of Sarbanes Oxley (in reaction to Enron’s failure) caused a massive amount of capital to flee the stock market looking for other ways to make a decent profit. The rules for Sarbox were not well understood, and the unpredictable penalties of not complying slowed down initial public offerings for new ventures. This made real estate very attractive as an alternative investment.
In the meantime, the was CRA generating a portfolio of risky loans that were not truly credit-worthy. Yet with low interest rates from the Fed, the number of subprime loans was climbing with low teaser rates. So Congress authorized Fannie and Freddie to lower their standards so the banks could effectively unload their loans onto you and me, and turn around and make more CRA loans. That’s why Frank and Dodd fought against reforming the GSEs - if the CRA program were stopped or slowed down considerably, groups like La Raza and ACORN who were raking in commissions from the sub-prime applications would no longer be funded and it would hamper their ability to campaign for democrat candidates.
The lowered GSE standards opened the door to a bonanza of sub-prime loans that the GSEs bought. The loans made the banks’ books look very profitable and hid the danger of default. Banks made sub-prime loans even when customers could have qualified for regular mortgages, because the loans were rated as AAA and made the banks look profitable. They could always be packaged and sold to Fannie and Freddie. The general idea was that real estate never lost value.
But the banks still weren’t sure they could survive a general downturn in the economy that would lead to loan defaults, so they purchased insurance from companies like AIG, in the form of Credit Default Swaps. These instruments were purported to guarantee the sub-prime loans in case of default, but they weren’t backed by anything! Look up Joseph Cassano if you want to know how AIG went into this market after Hank Greenberg was forced out. There are articles on my links page about him and his CDS instruments.
When this recession started, the effect of increased foreclosures was like setting gasoline on fire. Everything undergirding the housing market failed at the same time. The failure of the CDS market brought down Lehman, Bear-Sterns, AIG, JP Morgan, etc. The failure of the financial services companies rippled across the economy, in particular banks who held shares of these companies. Their loan-to-value balance was dramatically reduced, making many banks technically (or actually) insolvent.
At the same time, Sarbanes-Oxley came back with a vengeance, forcing banks to evaluate their assets at fire-sale prices, causing a downward spiral in bank bonds and equities. This hurt all banks because by regulation they had only limited investment options (banks can’t buy most stocks, they can only buy financial company’s stocks, other bank’s stocks, or shares of Fannie and Freddie).
Sound banking principles would have kept this from happening, but HUD, Fed, Fannie and Freddie, Congress and the rating agencies had all fallen prey to the idea of a great “untapped market” in poor areas (formerly called “redlining”) and immigrants (so called NINJA loans). Congress regulated social justice into the banking system, and it became a worldwide disaster.
But you can’t fit all this history on a bumper sticker, so liberals refuse to try to understand it.
Outstanding effort!! Your precis is a terrific piece of writing
One fact needs to be more heavily emphasized in my view.
I think that the AIG outing of Hank Greenburg was a calculated Democrat ploy to push aside a great old man,destroy a great company and completely reshape it to sell insurance to banks for purely political purposes. The banks, Freddie and Fannie, were offered a new product to cover the risks. The AIG coup indicates malice aforethought. It indicates premeditation by Eliot Spitzer to act under orders to get Hank Greenburg out of the way and place someone more compliant in the job.
Someone knew the banks were in trouble and concocted the AIG rug remedy. There was a calculated political intrusion that absolutely failed. We hear or see nothing of the political seizure of the banking industry to accomplish purely political Utopian goals.
The whole of the calculated effort indicates effort by an enterprise. The Democrat party is a criminal enterprise. The Democrat party should and still might be brought down by a RICCO enterprise criminal scheme.
unanswered...... then there is Lehman Brothers. It was exterminated without a whimper or harsh word by anyone. I wonder why? Who/what at Lehman pissed off so many, so bad there was no effort at all to salvage any of it.
Thank you bert, that is high praise coming from you. Your posts are well thought out and I always enjoy reading them. I totally agree with you that Greenberg had a target on his back. I wonder if Cassano had ties to the mob.
I also wonder if Lehman Bros was a test case (an early “stress test”?). When its assets were auctioned off, the CDS instruments were sold at less than 10 percent of their face value. That meant that CDS instruments at companies in trouble (AIG, JP Morgan, etc.) were also not worth much more than that. Bankruptcy for the other companies would reveal the rotten foundation of the entire financial services companies. So all these efforts to keep the system going by infusing huge amounts of cash are literally designed to paper over the huge black hole gaping underneath the treasury, the banks, the financial services, the GSEs, and the Fed. It is truly terrifying.
Here’s the article about Cassano. It glosses over the loss of Greenberg and tries to blame him obliquely.
Behind Insurer’s Crisis, Blind Eye to a Web of Risk
http://www.nytimes.com/2008/09/28/business/28melt.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin
Here’s a more in-depth look at Joseph Cassano and his infamous credit swaps. It talks about how Greenberg held the company back from the disastrous CDS instruments while he was there:
http://www.portfolio.com/news-markets/top-5/2008/09/28/AIGs-Derivatives-Run-Amok
A passage from the article:
Three years earlier, A.I.G. Financial Products was created as a joint venture between Greenberg and Sosin.
Known as the “Dr. Strangelove of Derivatives,” Sosin was regarded as a quantitative genius. He wrote scholarly articles on derivatives and briefly taught at Columbia Business School. Indeed, his inventive wizardry extends beyond the world of finance. He has registered numerous patents, one for a golf club that accommodates a golfer’s special swinging style.
In his new job at A.I.G. Financial Products, Sosin was given an unusual deal: a 20 percent stake in the unit and 20 percent of its profits.
Under Sosin, the unit dived into the nascent world of derivatives. It later branched out into energy, currencies, and commodities, and bought assets from cattle to the London City Airport.
But the fast-dealing culture caught Greenberg’s wary eye. By the early 1990s, Greenberg, who ruled the company with an iron fist, had grown so concerned about the unit’s derivatives dealings that he formed a secret “shadow team” of traders to mimic A.I.G. Financial Product’s trades, according to a former company executive.
Greenberg “was uncomfortable with the results,” this executive said. “He thought they were taking too many risks.”
The C.E.O. ordered Sosin to dial it back, but Sosin refused. He left the company in mid-1993 and sued A.I.G. He later received a payout of over $180 million from A.I.G.
“Under Hank, F.P. was always on its toes,” Kau, the former Financial Products executive said. Greenberg “didn’t have a derivatives background, but he was always vigilant about reading the reports.”
In 2005, Greenberg left the company he had built and ran for 40 years following scrutiny by regulators over its accounting practices.
Working title: “Resignation Watch for Lying Republican Senator.”
Personally.........I am thinking "we the people" ( that actually care...) are on our own.
Sadly........
bump
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