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.
Contents contributed and discussions participated by Ariel Shain
Criteria for Blame - 20 views
AIG - A Profile of AIG Insurance - 0 views
-
-
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.
Financial Crisis Panel Hears from AIG's Cassano, Goldman's Lewis - 0 views
-
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.
The Top 10 Worst Predictions of the Financial Crisis (AIG, AMZN, BAC, C, CSCO, GS) - 0 views
-
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...
Ratings Agencies Greed and Fraud Magnified Credit Crisis :: The Market Oracle :: Financ... - 0 views
-
Underlying the credit crisis gripping the U.S. and world economies is a crisis of confidence. Blame has been laid at the feet of the U.S. Federal Reserve, and an investment bankers' brew of toxic financial products. Ultimately, however, it was the supposedly trustworthy rating agencies that got everyone to drink the poisoned Kool-Aid.
-
Letter and number ratings – such as AAA, Aa1, BBB and Caa1 – are financial shorthand for the due diligence supposedly done by rating agencies after they've examined an issuer or a security's financial structure, and evaluated the likelihood of its being able to pay interest and principal at maturity
-
most state insurance regulators require that only assets rated in the top four ratings categories by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with the highest NRSRO ratings. In fact, innumerable institutions – public and private, and domestic and international – mandate asset quality levels predicated on the major rating agencies' due diligence.
- ...8 more annotations...
Goldman Sachs CDOs a 'Concern' for Crisis Panel, Angelides Says - BusinessWeek - 0 views
-
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...
Who Is To Blame For The Subprime Crisis? - 0 views
-
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...
Subprime Is Often Subpar - 1 views
-
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.
- ...1 more annotation...
Credit default swaps: The Real Reason for the Global Financial Crisis...the Story No On... - 0 views
-
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.
- ...2 more annotations...
What Caused the Current Financial Crisis? - 0 views
-
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...
1 - 11 of 11
Showing 20▼ items per page
Refinancing a mortgage is the process of re-evaluating the value of your home, to receive money, in the form of an addition to the mortgage, from the homes equity.
Before the financial crises, people would constantly refinance their mortgage to receive money, because house prices kept going up. People would get their house's value re-evaluated, and then receive money from their houses equity.
However when the housing bubble burst, house prices plummeted. So when people attempted to refinance their mortgage, not only did they receive a higher interest rate, but they were unable to get any money from their house, since prices had dropped. The issue now was that people had mortgages worth more than their house. As a result people could not pay off their loans, and thus foreclosures began to increase
To make things more liquid (easy to sell), securitization is a tool used by many financial institutions, including banks. The process of securitization involves pooling together many mortgages, and then selling the debt as a bond to other companies and etc. This kind of bond can be sold and resold, thus it is often hard to trace them back to an origin. The problem with the securitized subprime mortgages, is that as many of the mortgage-payers defaulted on payments, their houses we'rent worth as much as before, thus the securities that were sold, were now not worth much either
The collapse of the entire financial system fails together. This was evident in the financial crisis. Since all the CDO's and securitized investments were spread among many different companies and individuals, a lot of the financial system was interconnected. So when the houseing bubble burst and the mortgages began to fail, everything followed with it