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Han Kyul Lee

Bear Stearns Funds' Failure Opened the Door to Credit Crash - 6 views

www.larouchepub.com/...3427mbs_cdo_crash.html

shared by Han Kyul Lee on 13 Dec 10 - No Cached
    • Han Kyul Lee
      Han Kyul Lee on 10 Jan 11
       
      The failure of the two hedge funds by Bear Stearns resulted in a bailout by extending to the funds emergency loans of $1.6 to $3.2 billion.
  • the Plunge Protection Committee and Bear Stearns senior executives hammered out an arrangement, whereby Bear Stearns would fork out $3.2 billion in loans—equivalent to one-quarter of the bank's $13 billion in capital—to the two hedge funds, and thus to their creditors, rather than allow the creditors to sell CDOs, and rupture the system.
    • Han Kyul Lee
      Han Kyul Lee on 12 Jan 11
       
      The Plunge Protection Committee and Bear Stearns have arranged Bear Stearns to fork out $3.2 billion in loans to the hedge funds.
  • the Plunge Protection Committee and Bear Stearns senior executives hammered out an arrangement, whereby Bear Stearns would fork out $3.2 billion in loans—equivalent to one-quarter of the bank's $13 billion in capital—to the two hedge funds, and thus to their creditors, rather than allow the creditors to sell CDOs, and rupture the system.
  • ...4 more annotations...
  • If CDOs were shown in a large sale in the market to be worth half or less of their claimed or rated value, then this would expose the fact that most CDOs, especially those linked to subprime housing, were worth only 50 cents on the dollar. The holders of CDOs would have to devalue their holdings, and not just Bear Stearns, but all financial firms that hold CDOs. This would mean the write-down of hundreds of billions of dollars worth of fictitious CDO asset valuation, wiping out overnight the $2.6 trillion-plus CDO market, one of the fastest-growing parts of the financial bubble.
  • The failure of CDOs, and the associated credit derivatives, has the potential to rupture the $750 trillion-plus world derivatives market—a rupture which would instantaneously bring down the world financial system.
  • The failure has caused the near-freezing up of the highly risky $2.6 trillion Collateralized Debt Obligations (CODs) market.
  • On June 22, Bear Stearns investment bank announced that it intended to bail out two of its failing hedge funds, by extending to them between $1.6 to $3.2 billion in emergency loans—the latest twist in Wall Street efforts to prevent a full-blown mortgage securities market crisis.
  • Han Kyul Lee on 13 Dec 10
     
    From the July 6, 2007 issue of Executive Intellignece Review Notes: July 6, 2007 issue of Executive Intelligence Review -two hedge funds of Bear Stearns had failed, causing the $2.6 trillion CDOs market to nearly freeze up -Mortgage-backed losses caused another hedge fund by Caliber Global Investments -June 22, 2007: Bear Stearns to bail out its two failing hedge funds by extending to them in emergency loans of $1.6-3.2 billion, whose purposes are to prevent the creditors from seizing and selling the assets, and to prevent the failure of the hedge funds to trigger a systematic breakdown of the financial system -the hedge funds were the High Grade Structured Credit Enhanced Leverage Fund (HGSCELF) and the High-Grade Structured Credit Fund (HGSCF) that were invested in really risky CDOs, predominantly invested in subprime mortgages.
Ariel Shain

What Caused the Current Financial Crisis? - 0 views

www.stock-market-investors.com/...-current-financial-crisis.html

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - Cached
  • This was the case with the real estate bubble too and that was one of the main factors leading to the current financial crisis: the excess capital globally pushed an enormous amount of money into the US mortgage market thanks to the securitization and the fact that almost 80% of the US mortgage market is securitized.
  • The Problem with Securitization of Mortgages Basically, securitization is a wonderful financial vehicle. Mortgages are pooled together as securities and sold to investors. Of course, as securities, they can also be resold. Securitization creates diversification and liquidity.
  • However, the problem with securitization stems from the fact that it does not provide protection against systematic risk. And unfortunately, such a systematic risk was also not priced into the subprime mortgage pools... not until things went wrong and subprime borrowers started defaulting on their mortgages.
  • ...3 more annotations...
  • The subprime lending increased the homeownership rate in the United States significantly and about 5 million people went from tenants to homeowners. As a result, rents went down and house prices went up till they reached unsustainable heights relative to rents.
  • Thus, when the rise in housing prices stopped in 2006, inevitably many subprime borrowers had difficulty making their mortgage payments. The housing bubble and particularly the excesses of the subprime mortgage market became even more evident when many subprime mortgage lenders began declaring bankruptcy around March 2007.
  • Confidence in many financial institutions was shaken and the stock market witnessed systemic weakness across financial sectors. The share prices for large, small, and investment banks all significantly dropped and between July 2007 and March 2008, lost about a third of their value. What is more, banks stopped trusting other banks and interbank lending was disrupted.
Jeff He

The American Spectator : The True Origins of This Financial Crisis - 0 views

spectator.org/...1

blame financial crisis

shared by Jeff He on 14 Jan 11 - No Cached
    • Jeff He
      Jeff He on 14 Jan 11
       
      Very nice article that shows the root of the cause of the financial crisis. It places the blame on everyone, but shows that poor lending policies/standards advocated by the government triggered everything.
  • Tax laws further amplified the problems of the housing bubble and diminished levels of home equity, especially the deductibility of interest on home equity loans.
  • The GSEs’ purchases of sub-prime and Alt-A loans affected the rest of the market for these mortgages in two ways. First, it increased the competition for these loans with private-label issuers.
  • ...11 more annotations...
  • Second, the increased demand from the GSEs and the competition with private-label issuers drove up the value of sub-prime and Alt-A mortgages, reducing the risk premium that had previously suppressed originations. As a result, many more marginally qualified or unqualified applicants for mortgages were accepted.
  • Since these mortgages aggregate more than $2 trillion, this accounts for the weakness in bank assets that is the principal underlying cause of the current financial crisis.
  • state-based residential finance laws give homeowners two free options that contributed substantially to the financial crisis. First, any homeowner may, without penalty, refinance a mortgage whenever interest rates fall or home prices rise to a point where there is significant equity in the home, enabling them to extract any equity that had accumulated between the original financing transaction and any subsequent refinancing.
  • The homeowner’s opportunity to walk away from a home that is no longer more valuable than the mortgage it carries exacerbates the effect of the cash-out refinancing.
  • From 2005 to 2007, Fannie and Freddie bought approximately $1 trillion in sub-prime and Alt-A loans.
  • interest on home equity loans is deductible no matter how the funds are used. As a result, homeowners are encouraged to take out home equity loans to pay off their credit card or auto loans or to make the purchases that would ordinarily be made with other forms of debt.
  • Bank regulatory policies should also shoulder some of the blame for the financial crisis.
  • Bank assets are assigned to different risk categories, and the amount of capital that a bank holds for each asset is pegged to the asset’s perceived riskiness.
  • These rules provided an incentive for banks to hold mortgages in preference to commercial loans or to convert their portfolios of whole mortgages into an MBS portfolio rated AAA, because doing so would substantially reduce their capital requirements.
  • U.S. housing policies are the root cause of the current financial crisis. Other players--greedy investment bankers; incompetent rating agencies; irresponsible housing speculators; shortsighted homeowners; and predatory mortgage brokers, lenders, and borrowers--all played a part, but they were only following the economic incentives that government policy laid out for them.
  • our first order of business should be to correct the destructive housing policies of the U.S. government.
Jeremy Ip

Risk Management Post Crisis. - 0 views

www.rusrating.ru/...index.php

Rating Agencies management risk

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • The global crisis was caused by poor risk management and by the very agencies that are supposed to measure risk. Indeed the very companies that were supposed to have the most sophisticated risk management systems in the world and which invented risk management techniques failed.
  • The most successful risk managers and investors use the techniques of risk managers, but do not rely on them.
  • However, far too many risk managers rely on the techniques without thinking.
  • ...5 more annotations...
  • They are like Churchill's political opponents who used statistics in the way a drunk uses a lamp post, for support rather than illumination.
  • Even so, weakness in a single market should not have created a global crisis of such colossal dimensions. The entire market collapsed because the volumes of new exotic financial instruments were so large that as soon as flaws appeared in the structure of the markets, key institutions crumbled under the weight of the products they had sold. The exotic financial instruments are new, the financial markets are new, but the phenomenon of human arrogance and pride is as old as mankind.
  • he big rating agencies were at fault for putting revenue before analytical quality, and they were at fault for claiming that the reputation they had earned from their bond ratings could be transferred to structured products and other types of rating.
  • Rating agencies are the product of the economic law of specialisation – it is cheaper and more efficient to give a specific task to a dedicated professional or company, who supplies many customers, than to hire the professional for your own firm.
  • The problem in the rating business that caused the crisis is that a monopoly was created for two firms and the firms exploited the monopoly.
Ariel Shain

Who Is To Blame For The Subprime Crisis? - 0 views

www.investopedia.com/...subprime-blame.asp

financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - No Cached
  • In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors.
  • Biggest Culprit: The LendersMost of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default.
  • When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.
  • ...12 more annotations...
  • Lenders lost money on defaulted mortgages as they were increasingly left with property that was worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.
  • Partner In Crime: HomebuyersWhile we're on the topic of lenders, we should also mention the home buyers. Many were playing an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages
  • However, instead of continued appreciation, the housing bubble burst, and prices dropped rapidly
  • As a result, when their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created as housing prices fell. They were, therefore, forced to reset their mortgage at higher rates, which many could not afford. Many homeowners were simply forced to default on their mortgages. Foreclosures continued to increase through 2006 and 2007.
  • subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations
  • a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.The chart below demonstrates the incredible increase in global CDOs issues in 2006.
  • Investment Banks Worsen the SituationThe increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum.
  • Rating Agencies: Possible Conflict of InterestA lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad.
  • The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency
  • Fuel to the Fire: Investor BehaviorJust as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.
  • Final Culprit: Hedge FundsAnother party that added to the mess was the hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem.
  • there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem.
Han Kyul Lee

Crisis Pie Infographic - 55 views

Rating agencies, sub-prime mortgage lenders and investment banks are DEFINITELY the biggest titles at fault. The main reasons have already been covered; rating agencies failed to rate the toxic ass...

financial crisis economics crisis blame Financial caused what pie infographic

started by Abdiwahab Ibrahim on 14 Jan 11 7 follow-ups, last by Han Kyul Lee on 19 Jan 11
Jeff He

Fannie Mae and Freddie Mac - Their Role in the Current Financial Crisis - 0 views

ezinearticles.com/?Fannie-Mae-and-Freddie-Mac---Their-Role-in-the-Current-Financial-Crisis&id=3892722

Mae Fannie financial crisis Causes

shared by Jeff He on 14 Jan 11 - No Cached
    • Jeff He
      Jeff He on 14 Jan 11
       
      Main cause of the financial crisis lies with government deregulation of lending practices and their push for higher homeownership.  
  • "Creative" lending practices dragged down overall lending standards
  • Big FMs and private banks were encouraged to employ "innovative" and " flexible" lending practices in order to help homeowners who could not previously qualify for a mortgage to be able to buy a home and make mortgage payments.
  • ...3 more annotations...
  • increasing pressure from Bill Clinton's administration on Fannie Mae and Freddie Mac to increase lending quotas to minorities and middle and low-income home buyers in so- called "under-served" areas (usually inner cities).
  • being pushed by the Federal Housing initiatives Fannie & Freddie, private banks and the rest of the players in the housing and mortgage industry jumped on sub-prime bandwagon seeing only big profits ahead.
  • answer is correct destructive and dangerous housing practices and introduce more transparency and accountability for the banking sector.
Abdiwahab Ibrahim

Boom, Bust and Blame - The Inside Story of America's Economic Crisis - Global Recession... - 1 views

www.cnbc.com/31189237

financial crisis economics crisis blame financial caused what

shared by Abdiwahab Ibrahim on 13 Jan 11 - No Cached
  • Millions of workers across all industries and sectors would lose their jobs.
  • we had spent, borrowed, and fooled ourselves into a false sense of security.
  • Government Seizes Fannie Mae And Freddie Mac
  • ...16 more annotations...
  • Lehman Rocks Wall Street, Declares Bankruptcy
  • The Treasury Department and Federal Reserve watched Lehman implode, unable to predict the scope of the global financial damage that would follow.
  • While Lehman Brothers failed to find a buyer, Merrill Lynch succeeded
  • Merrill’s CEO Stan O’Neal was so fixated on the revenue generated by the mortgage business, he didn’t just want to securitize them, he wanted to originate them, too. So, in 2007, Merrill bought mortgage lender First Franklin.
  • Bank Of America Rescues Merrill From ExtinctionBy September 2008, Merrill Lynch was suffering huge mortgage-related losses.
  • Although Bank of America’s purchase of Merrill ultimately saved the company, the transaction later came under intense scrutiny because of larger-than-expected losses and controversial year-end bonuses paid to Merrill executives.
  • Fed Accused Of 'Cover Up' In BofA, Merrill Deal
  • “Too Big To Fail,” Feds Take Control Of AIG
  • Paulson And Bernanke Issue Dire Warning
  • Paulson requested $700 Billion from Congress for a program intended to buy toxic assets from banks and infuse financial institutions with capital
  • contained no rules and standards for oversight. Infuriated politicians
  • Washington Mutual, weighed down by mortgage-related losses, was seized by federal regulators and sold to JPMorgan Chase.
  • largest bank failure in U.S. history, caused by an old fashioned, Depression-like run on WaMu’s deposits, following rumors about the bank’s ability to survive. 
  • Dow Jones Industrial Average plunged a record 778 points, its biggest drop in history.
  • Congress acted again. This time, lawmakers  approved the package, known as the Troubled Asset Relief Program. It included significantly greater oversight of the $700 Billion and more specific details on how it would be used to bolster the U.S. banking system.
  • Paulson’s “tough love” was a bitter pill for some bank bosses to swallow.
  • Abdiwahab Ibrahim on 13 Jan 11
     
    P9
Stephen Lu

Robert J. Samuelson - Alan Greenspan's flawed analysis of the financial crisis - washin... - 0 views

www.washingtonpost.com/...AR2010032101707.html

alan greenspan financial crisis error economics

shared by Stephen Lu on 12 Jan 11 - Cached
    • Stephen Lu
      Stephen Lu on 12 Jan 11
       
      Just uber baller points by Greenspan all over. No other comments.
  • Greenspan is in part contrite. He admits to trusting private markets too much, as he had in previous congressional testimony. He concedes lapses in regulation. But mainly, he pleads innocent and makes three arguments.
  • First, the end of the Cold War inspired an economic euphoria that ultimately caused the housing boom. Capitalism had triumphed. China and other developing countries became major trading nations. From the fall of the Berlin Wall to 2005, the number of workers engaged in global trade rose by 500 million. Competition suppressed inflation. Interest rates around the world declined; as this occurred, housing prices rose in many countries (not just the United States) because borrowers could afford to pay more.
  • ...5 more annotations...
  • Second, the Fed's easy credit didn't cause the housing bubble because home prices are affected by long-term mortgage rates, not the short-term rates that the Fed influences. From early 2001 to June 2003, the Fed cut the overnight federal funds rate from 6.5 to 1 percent. The idea was to prevent a brutal recession following the "tech bubble" -- a policy Greenspan still supports. The trouble arose when the Fed started raising the federal funds rate in mid-2004 and mortgage rates didn't follow, as they usually did. What unexpectedly kept rates down, Greenspan says, were huge flows of foreign money, generated partially by trade surpluses, into U.S. bonds and mortgages.
  • Greenspan favors tougher capital requirements for banks. These would provide a larger cushion to absorb losses and would bolster market confidence against serial financial failures. Before the crisis, banks' shareholder equity was about 10 percent: $1 in shareholders' money for every $10 of bank loans and investments. Greenspan would go as high as 14 percent.
  • It was not the end of the Cold War, as Greenspan asserts, that triggered the economic boom. It was the Fed's defeat of double-digit inflation in the early 1980s. Since the late 1960s, high inflation had destabilized the economy. Once it fell -- from 14 percent in 1980 to 3 percent in 1983 -- interest rates slowly dropped.
  • Greenspan's complicity in the financial crisis stemmed from succeeding too much, not doing too little. Recessions were infrequent and mild. The 1987 stock market crash, the 1997-98 Asian financial crisis and the burst "tech bubble" did not lead to deep slumps. The notion spread that the Fed could counteract almost any economic upset. Greenspan, once a critic of "fine-tuning" the business cycle, effectively became a convert. The world seemed less risky. The problem of "moral hazard" -- meaning that if people think they're insulated from risk, they'll take more chances -- applied not just to banks but to all of society: bankers, regulators, economists, ordinary borrowers and consumers.
  • "We had been lulled into a state of complacency," Greenspan writes in passing, failing to draw the full implication. Which is: Too much economic success creates the seeds of its undoing. Extended prosperity bred overconfidence that led to self-defeating behavior.
  • Stephen Lu on 12 Jan 11
     
    Alan Greenspan's take on the financial crisis.
Liron Danovich

How To Prevent the Next Financial Crisis - CBS MoneyWatch.com - 0 views

moneywatch.bnet.com/...185

shared by Liron Danovich on 12 Jan 11 - No Cached
  • Understanding what went wrong is important because it provides a guide to the best types of legislative and regulatory responses to use to minimize the chances of this happening again
  • In assessing the causes of this crisis, one clear culprit was the failure of regulators and market participants alike to fully appreciate the strength of the amplifying mechanisms that were built into our financial system.
  • At its most fundamental level, this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years
  • ...6 more annotations...
  • So what should we do try to prevent this from happening again? Fixing these incentive problems is certainly a start, as is bringing the shadow banking system under the same regulatory umbrella as the traditional system
  • limiting leverage ratios (through higher capital requirements),
  • We also need to make sure that financial firms are not too big or too interconnected to fail.
  • we need to have the plans and the legal authority in place to deal with insolvent financial institutions, something that was very much needed but missing in the present crisis
  • we need much more transparency in these markets and in the assets that are traded
  • All financial transactions should either pass through organized exchanges, or be subject to some sort of strict reporting requirements to regulators.
  • Liron Danovich on 12 Jan 11
     
    Things that can be done in order to try to prevent a fainancial crisis from happening again- By Mark Thoma a macroeconomist and time-series econometrician at the University of Oregon.
anonymous

Financial Crisis for Beginners « The Baseline Scenario - 13 views

baselinescenario.com/financial-crisis-for-beginners

video detail explanation Beginners AIG CDS financial crisis

shared by anonymous on 01 Dec 10 - Cached
    • anonymous
      anonymous on 11 Jan 11
       
      What CDS really is and why it's dangerous and how it triggered the financial crisis. 
    • anonymous
      anonymous on 11 Jan 11
       
      The reason why the gov't would not let AIG fail even though it didn't lend a hand to Lehman, is that AIG had in possession a large number of CDSs and no one can predict the consequences it can cause the financial market if it defaulted.
  • Second, you have the risk that the insurance companies won’t be able to pay. If a financial institution – say, AIG – sold a lot of CDS based on the debt of a particular company – say, Lehman – there is a risk that it won’t be able to honor all of those swap contracts.
  • ...3 more annotations...
  • CDS are one of the things that create uncertainty in the banking sector; a bank may look healthy, but it may be counting on CDS payouts from other banks that you can’t see, so you can’t be sure it’s healthy, so you won’t lend to it.
  • The cumulative effect of CDS is to spread risk, which sounds good, but to spread risk in unpredictable and invisible ways
  • One of the major reasons why the government refused to let AIG fail – one day after letting Lehman fail – was that AIG was a large net seller of CDS, and if it had defaulted on those swaps no one could predict what the implications would be for the rest of the financial sector.
Anna Toronova

How Will Washington Prevent Another Financial Crisis? - 0 views

www.america.gov/...185854berehellek0.3798029.html

prevention financial crisis

shared by Anna Toronova on 11 Jan 11 - No Cached
  • The crisis, the worst since the Great Depression of the 1930s, has already brought down a half-dozen major banks and other financial companies. But at its core, the debacle was caused by the fairly recent practice of selling to more and more homebuyers larger loans than they could afford.
  • Mark Tenhundfeld of the American Bankers Association expects Congress to pass laws against so-called predatory lending. Additionally, he said, it may require a federal license for mortgage lenders. “But enforcement will probably be left to the states,” he said.
  • Mark Perlow, a securities attorney with the law firm K&L Gates LLP, thinks the government will require companies to keep a financial stake in all the mortgages, credit cards and similar consumer products they sell. “The originators of debt will have to keep some skin in the game,” he said.
  • ...2 more annotations...
  • The market in credit-default swaps and other complex instruments known collectively as derivatives has become huge and lucrative in recent years, but is unregulated. Observers expect Congress and the regulators to make the field more transparent and to introduce new regulations.
  • Reserve requirements could be established. Commercial banks, for example, are generally required to keep on hand $1 of cash for every $10 they owe to account holders or they loan out. (Investment banks typically have no such requirements, and keep only $1 for every $30 or more they borrow to invest. They have made fortunes. But when investments go bad, they have few reserves to cover their losses.) Perlow, the attorney, expects Congress to debate amending the Commodity Futures Modernization Act of 2000, which kept derivatives unregulated
Ariel Shain

Goldman Sachs CDOs a 'Concern' for Crisis Panel, Angelides Says - BusinessWeek - 0 views

www.businessweek.com/...isis-panel-angelides-says.html

goldman sachs financial crisis what caused economics blame

shared by Ariel Shain on 12 Jan 11 - No Cached
  • Goldman Sachs Group Inc.’s sales of collateralized debt obligations are “an area of interest and concern” for the U.S. commission investigating the financial crisis,
  • Goldman Sachs was sued by the U.S. Securities and Exchange Commission for fraud tied to CDOs that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent today and financial stocks slumped.
  • questioned Goldman Sachs Chief Executive Officer Lloyd Blankfein on the firm’s sales of mortgage-backed securities that it bet would eventually fail.
  • ...1 more annotation...
  • “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,”
Ariel Shain

AIG - A Profile of AIG Insurance - 0 views

useconomy.about.com/...AIG.htm

financial crisis what caused blame AIG

shared by Ariel Shain on 12 Jan 11 - No Cached
  • Why Is AIG Important?:AIG was a major seller of "credit default swaps." These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions bought these swaps.
  • AIG is so large that its demise would impact the entire global economy. For example, the $3.6 trillion money-market fund industry invested in AIG debt and securities. Most mutual funds own AIG stock. Financial institutions around the world are also major holders of AIG's debt.
  • How Did AIG Almost Fail?:AIG's swaps against subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. Even though AIG had more than enough assets to cover the swaps, it couldn't sell them before the swaps came due. This left it without the cash pay the swap insurance.
  • Jasmine Ding on 12 Jan 11
     
    very helpful!
Ariel Shain

Financial Crisis Panel Hears from AIG's Cassano, Goldman's Lewis - 0 views

www.insurancejournal.com/...111180.htm

financial crisis what caused blame AIG goldman sachs

shared by Ariel Shain on 12 Jan 11 - No Cached
  • Goldman has been criticized for benefiting from the taxpayer bailout of AIG.
  • AIG said in March, 2009, that $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank.
  • Cassano and AIG Chief Risk Officer Robert Lewis said in their written testimony that they believed the collateralized debt obligations (CDOs) -- the loan portfolios linked to the credit default swaps -- were relatively conservative and could have recovered with time. But Lewis said the deteriorating financial environment triggered collateral calls that depleted AIG's liquidity and the federal government stepped in.
Ariel Shain

The Top 10 Worst Predictions of the Financial Crisis (AIG, AMZN, BAC, C, CSCO, GS) - 0 views

www.fool.com/...ons-of-the-financial-cris.aspx

financial crisis what caused blame top 10

shared by Ariel Shain on 12 Jan 11 - No Cached
  • 8. AIG financial products head Joseph Cassano (August 2007)"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions." Those transactions nearly bankrupted AIG (NYSE: AIG) months later, in a financial nuclear explosion that pulled everyone from Goldman Sachs (NYSE: GS) to Citigroup (NYSE: C) to Bank of America (NYSE: BAC) into the mix. The lesson: Tail risk -- the really big risk that's hard to measure -- is the single most important kind of risk you can think about. Take whatever worst-case scenario you can think of, multiply it by 100, and prepare for it
  • 7. National Association of Realtors chief economist David Lereah (2006)"The good news is that inventory levels are improving and housing supply will come closer to buyer demand in 2006. We expect a healthy and more balanced market next year."  Of all the bad predictions Lereah made, I picked this one because it underscores an important aspect of bubbles. Lereah may have been right in his prediction that demand was coming in line with supply. But what he missed that demand itself was a bubble. If supply and demand are in line, but demand is being driven by a bunch of myopic idiots plowing into real estate only because they want to flip it two months later, the market is out of balance.
  • 4. Former Sen. Phil Gramm (July 2008)"[T]his is a mental recession. ... We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline ..." Some downturns truly are just psychological in nature. The (very short) post-9/11 slump, for example. But what we faced in 2008 was the real deal. People couldn't pay off their debts. Banks couldn't raise capital. Companies couldn't roll over commercial paper. There was nothing mental about it. It was a real, tangible decline.
  • ...1 more annotation...
  • 2. Alan Greenspan (May 2005)"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions. ... Derivatives have permitted the unbundling of financial risks." Finance is probably the one industry where innovation is mostly problematic. Banking should be easy: Lend money to people who can pay you back. Most attempts to complicate it beyond that are steps toward instability.
Jeremy Ip

The financial crisis: challenges and responses - 0 views

www.ecb.int/...sp091016_2.en.html

Rating Agencies

shared by Jeremy Ip on 12 Jan 11 - No Cached
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is.
  • in the four years leading up to the summer of 2007, macro-financial conditions were very favourable – on the surface, that is. The world economy was growing strongly; inflation was low; liquidity in capital markets was abundant; the financial sector was providing remarkable returns; profitability was high; asset prices were rising, and implied volatilities in equity markets, bond markets, credit markets and foreign exchange markets all very low by historical standards; and finally, risk premia were extraordinarily small.
  • nnovation was rapidly taking place in financial markets. One prominent example is securitisation: banks repackaged loans, in particular, mortgage loans and sold them on, thereby freeing up capital for new lending. This was widely perceived as a positive development, as it enabled a better and wider distribution of risk. This perception is likely to have encouraged risk-taking not only inside but also outside the financial sector. With abundant liquidity available, some banks’ business lines became heavily dependent on securitisation and on funding from the unsecured money markets.
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  • one blemish
  • significant imbalances were building up at various levels in the global economy and the global financial system
  • exuberant real estate prices and an ebullient securitisation business which facilitated huge credit growth
  • developments were unsustainable and would only need a spark to cause turmoil in the financial markets and the world economy
  • US mortgage market provided that spark.
  • Rising delinquencies and foreclosures revealed the exuberance in the housing market, and brought the sub-prime business to a sudden halt. Securitisation markets froze, banks had to bring assets from special purpose vehicles back onto their balance sheets, and confidence in the financial markets started to crumble. The crisis rapidly spread through the financial sector and spilled over to other industrialised and emerging market economies.
  • Central banks became the first line of defence, responding to the emerging crisis by injecting liquidity into the financial system. When the liquidity crisis became a solvency crisis that threatened the stability of the financial system, governments initially resorted to traditional measures to rescue individual institutions: liquidity lines were granted to insolvent institutions which in many cases were then sold and merged with a partner presumed to be stronger.
  • inancial system stood on the brink of disaster in autumn 2008 after the collapse of Lehman Brothers on 15 September. Its failure sent a shock wave through the global financial system, largely due to its importance as a counterparty in the credit derivatives market.
  • Conditions in interbank markets and other short-term funding markets deteriorated sharply. Credit risk spreads rose to new highs, and equity prices fell sharply. And financial markets in emerging market economies came under pressure as a flight to safety reversed capital flows.
Ariel Shain

Subprime Is Often Subpar - 1 views

www.investopedia.com/...subprime.asp

financial crisis what caused economics blame subprime

shared by Ariel Shain on 12 Jan 11 - No Cached
  • Subprime mortgages are often associated with borrowers who have a tainted or limited credit history. This is because a subprime mortgage can offer a consumer a way to purchase a home while they repair or build their credit history.
  • Subprime 2/28 and 3/27 ARMs frequently have prepayment penalties. A prepayment penalty is a provision in the mortgage contract that requires the borrower to pay a certain percentage of the mortgage's remaining principal balance or a certain number of months' interest if the mortgage is paid off before the end of a prepayment penalty period
  • Subprime 2/28 and 3/27 ARMs sometimes lack interest rate cap structures. An interest rate cap structure limits the amount by which, and the rate at which, the fully indexed interest rate can increase at each scheduled interest rate adjustment date and/or over the life of the mortgage.
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  • Because many subprime borrowers intend to refinance their adjustable-rate mortgage before, or at the end of, the fixed interest rate period, they frequently do not pay attention to how the fully indexed interest rate is calculated, ignore the mortgage's interest rate cap structure, or are sometimes ignorant of the fact that the mortgage has a prepayment penalty.
Ariel Shain

Credit default swaps: The Real Reason for the Global Financial Crisis...the Story No On... - 0 views

moneymorning.com/...credit-default-swaps

financial crisis what caused economics blame swaps default credit

shared by Ariel Shain on 12 Jan 11 - No Cached
  • A credit default swap is, essentially, an insurance contract between a protection buyer and a protection seller covering a corporation's, or sovereign's (the “referenced entity”), specific bond or loan. A protection buyer pays an upfront amount and yearly premiums to the protection seller to cover any loss on the face amount of the referenced bond or loan.
  • Credit default swaps are bilateral contracts, meaning they are private contracts between two parties. CDSs are subject only to the collateral and margin agreed to by contract. They are traded over-the-counter, usually by telephone. They are subject to re-sale to another party willing to enter into another contract. Most frighteningly, credit default swaps are subject to “counterparty risk.”
  • Credit default swaps are not standardized instruments. In fact, they technically aren't true securities in the classic sense of the word in that they're not transparent, aren't traded on any exchange, aren't subject to present securities laws, and aren't regulated.
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  • The bad news is that there are even worse bets out there. There are credit default swaps written on subprime mortgage securities. It's bad enough that these subprime mortgage pools that banks, investment banks, insurance companies, hedge funds and others bought were over-rated and ended up falling precipitously in value as foreclosures mounted on the underlying mortgages in the pools. What's even worse, however, is that speculators sold and bought trillions of dollars of insurance that these pools would, or wouldn't, default! The sellers of this insurance (AIG is one example) are getting killed as defaults continue to rise with no end in sight.
  • What happened to AIG is simple: AIG got greedy. AIG, as of June 30, had written $441 billion worth of swaps on corporate bonds, and worse, mortgage-backed securities. As the value of these insured-referenced entities fell, AIG had massive write-downs and additionally had to post more collateral. And when its ratings were downgraded on Monday evening, the company had to post even more collateral, which it didn't have.
Abdiwahab Ibrahim

FCIC Credit Ratings Report - 0 views

www.fcic.gov/...2010-0602-Credit-Ratings.pdf

blame Rating Agencies financial crisis economics crisis financial what caused

shared by Abdiwahab Ibrahim on 12 Jan 11 - No Cached
  • Abdiwahab Ibrahim on 12 Jan 11
     
    Blame for the CRAs.
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