Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

Desperate for cash, AIG illegally raids insurance subsidiaries

AIG's derivative Bets Blowing Sky High

Here is what happened: AIG made the same stupid bets that Lehman and Bear Stearns did on mortgage backed security derivatives. It's losses are mounting. It needs $75 billion. From who and how will it get $75 billion?

Let's Borrow From Ourselves

The Washington Post is reporting N.Y. Will Let AIG Borrow $20 Billion From Its Own Subsidiaries

Scrambling to prevent another meltdown in the financial system, government officials in New York and Washington were trying to buy insurer AIG more time today and line up private loans of as much as $75 billion to rescue the troubled giant.

New York's governor said his state will allow AIG, the nation's largest insurer, to use $20 billion from its own insurance subsidiaries to ease a financial crunch.

By posting the assets as collateral, AIG can borrow money to run its day-to-day operations, Gov. David A. Paterson (D) said at a news conference. The move required special dispensation from the state regulator responsible for protecting the stability of AIG subsidiaries in New York and their policyholders.

Wrapup

Let's tie it all together.

New York Gov. David A. Paterson (D) is going to violate regulations and allow AIG to borrow up to $20 billion from its subsidiaries. Timothy Geithner, president of the Federal Reserve Bank of New York approves this transaction. New York state insurance superintendent Eric R. Dinallo claims "At this point the insurance companies are financially strong and solvent and fully able to meet any claims." In the proposed swap-o-rama the spokesman for the superintendent claims "We're not going to allow them to put junk in the place of good stuff." (as if he has any clue).

Here's the Deal

If the "insurance companies are financially strong and solvent" why the hell do they need to raise $75 billion in another all night poker game with every rule in the book being broken to do so?

What's At Risk?

Life insurance policies, retirement annuities, and those with policy coverage against all manner of calamities, from financial to natural disasters are put at risk just so AIG can make good on a bunch of derivative bets gone bad.

LIBOR Skyrockets

Bloomberg | Money-Market Rates Double Amid Global Credit Seizure

The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings Inc. and credit downgrades of American International Group Inc. led banks to hoard cash.

The London interbank offered rate, or Libor, that financial institutions charge each other to borrow soared 3.33 percentage points to 6.44 percent today, its biggest jump in at least seven years, according to the British Bankers' Association. The rate was as low as 2.07 percent in June.

Banks are driving up short-term lending rates on concern that AIG, the biggest U.S. insurer, will follow Lehman into bankruptcy and leave financial institutions with losses on $441 billion of credit derivatives. Central banks around the world pumped more than $210 billion into the financial system as they sought to alleviate the credit-market seizure.

There May Still Be Some Tiny Amount of Justice in the World

No Golden Parachutes for Fannie and Freddie Bosses

It seems these days, no matter how poorly your company performs, you still end up walking away a winner if you’re the boss.

But now former Fannie Mae and Freddie Mac CEOs Daniel Mudd and Richard Syron will see their severance challenged by their new regulator, the Federal Housing Finance Agency.

In a statement released Sunday, the agency said it had informed the pair that they would not receive their so-called “golden parachute” payments.

According to the Washington Post, the severance packages could be worth up to $14.9 million for Syron and $9.8 million for Mudd.

However, it’s unclear how much of that is considered part of the “golden parachute” and what the FHFA actually intends to block.

Last year, the pair claimed about $30 million in compensation, including $18.3 million to Syron and $11.6 million to Mudd.

The loss of severance will be a big blow to the former execs, as shares of Fannie and Freddie are now essentially worthless, currently trading between 40 and 65 cents each.

Back in January, former Countrywide boss Angelo Mozilo decided to forego his $37.5 million severance package after pocketing hundreds of millions in stock options before the mortgage lender’s performance began to deteriorate.

Most underappreciated book of 2006

And speaking of the housing bubble's unwind, here's a candidate for "Most underappreciated book of 2006", this prescient [and completely unbiased] tome from the former senior vice president and chief economist of the National Association of Realtors:

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them (Hardcover)

[M29]

Originally Posted by garo

PS: Instead of predicting how Democrats will make the problem worse, why not spend a bit of time on how the Republicans created the problem?

Here's a different take by Thomas Sowell:

Blaming the lenders is the party line of Congressional Democrats as well. What we need is more government regulation of lenders, they say, to protect the innocent borrowers from "predatory" lending practices.

Before going further down that road, it may be useful to look back at what got us into this mess in the first place.

It was not that many years ago when there was moral outrage ringing throughout the media because lenders were reluctant to lend in certain neighborhoods and because banks did not approve mortgage loan applications from blacks as often as they approved mortgage loan applications from whites.

All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money.

Link to complete article: http://jewishworldreview.com/cols/sowell072208.php3

[ewmayer]

Originally Posted by M29

"It was not that many years ago when there was moral outrage ringing throughout the media because lenders were reluctant to lend in certain neighborhoods and because banks did not approve mortgage loan applications from blacks as often as they approved mortgage loan applications from whites.

All this was an opening salvo in a campaign to get Congress to pass laws forcing lenders to lend to people they would not otherwise lend to and in places where they would not otherwise put their money."

I'm still looking for the democrat-sponsored house or senate bill that forced "reluctant" lenders to do the following things which mere greed would never have induced them to:

- Lenders must offer a dizzying array of "new innovative" mortgages, including teaser-rate ARMs, no-money-down-loans, stated-income loans, and negative-amortization loans;

- Lenders must fail to due even modest amounts of due diligence in verifying borrowers income and current debt;

- Lenders must collude with crooked appraisers and RE agents to artificially inflate the appraised value of properties in order to maximize the size of the resulting loans;

- Lenders must throw not only "innovative" mortgages at anyone with a pulse, they must further put massive pressure on borrowers to take out $100K-or-more HELOCs, and encourage said borrowers to make use of said HELOcs for day-to-day-spending rather than their historic "emergency" usage by "living richly" and other often-repeated slogans;

- Federal Reserve must fail utterly in its duty to oversee lending practices and make sure predatory lending is not occurring - bad for business, you know;

- Government must cease any oversight of ratings agencies, except to make sure they are blessing the widest possible array of Structured Investment Vehicles backed by the above kinds of loans with their cherished AAA ratings;

- Fed Chairman must actively promote the above kinds of innovative mortgage products and financial "innovation", and continually stress that home prices will always rise, and that - contradicting the subject of his own PhD thesis - there are no such things as "housing bubbles".

Yep, damn Democrats, who forced the previously nongreedy banks and mortgage lenders to engage in such loathsome practices.

Sorry, Luke, not buying - there's plenty of blame to go around, and the Dems have their fair share of "friends of Angelo" [e.g. Barney Frank, Chris Dodd, and Chuck Schumer], but nearly all of this mess occurred on Bush's watch, and was actively abetted by a Fed Chairman and Ayn Rand disciple appointed by Reagan. Clinton has his own financial-deregulatory shame to deal with, but even in that case, the chief architects of the legislation (Gramm and Leach) were both Republicans.

[ewmayer]

NYTimes: Federal Reserve May Act Alone in Rescuing A.I.G.

September 16, 2008, 5:24 pm

The fate of the American International Group now lies with Federal Reserve, as the likelihood of a $75 billion credit line financed by a bank syndicate appears remote, people briefed on the matter said Tuesday afternoon.

It is not known whether the Fed would now change course and agree to provide an emergency infusion of capital to the cash-starved insurance giant, or what form such aid would take. If the Fed decides not to intervene, A.I.G. will likely file for bankruptcy by Wednesday, these people said.

In an intense discussion at the Federal Reserve Bank of New York, the Fed and a group of executives from JPMorgan Chase, Goldman Sachs and other firms agreed that a banking syndicate to provide the $75 billion in emergency financing could not be arranged by Tuesday night.

If the Fed intervenes, it would be an eleventh-hour bailout of A.I.G., whose debt downgrades by major credit ratings agencies could have sparked a debilitating need for additional capital.

Concerns about A.I.G.’s health have gripped the financial markets, as many investors feared the insurance giant would follow Lehman Brothers into bankruptcy. An A.I.G. collapse could prove an even bigger systemic threat to major financial firms than Lehman’s downfall, because of the company’s dominant position in insuring mortgage-linked securities. Should A.I.G. fail, it could kick off a wave of additional write-downs at banks already staggering from the credit crunch.

Kenneth Lewis, the chief executive of Bank of America, told CNBC on Monday that virtually every Wall Street giant would be touched by an A.I.G. failure. (In a surprise commingling of financial crises, the landlord of Lehman’s London office said the bank’s rent payments were insured by A.I.G.)

Gov. David A. Paterson of New York, whose insurance department supervises A.I.G., on Monday allowed the company to borrow $20 billion from its subsidiaries, and urged the Fed to relent and offer financial aid. Mr. Paterson told CNBC Tuesday morning that the company could survive only one day without the financing.

Andrew M. Cuomo, New York’s attorney general, on Tuesday also urged the Fed to help, arguing that it was too connected with major banks to be allowed to fail.

But other top politicians, including Senator Richard Shelby of Alabama, the top-ranked Republican in the Senate Banking Committee, and Senator John McCain, the Republic presidential candidate, have both expressed opposition to federal help for A.I.G.

The magnitude of a potential A.I.G. collapse compelled a group of top banking executives to huddle at the New York Fed last weekend. Throughout the discussions, however, Treasury Secretary Henry M. Paulson Jr. insisted that no taxpayer money be used to rescue the insurer. The federal government has already brokered the sale of Bear Stearns and the rescue of the mortgage financing giants Fannie Mae and Freddie Mac.

A.I.G.’s collapse seemed so imminent on Tuesday that the company hired the law firm Weil, Gotshal & Manges — which is also handling the Lehman Brothers bankruptcy — to draw up bankruptcy papers.
Many of A.I.G.’s subsidiaries have drawn down on their credit lines, people briefed on the matter said.

Shares in A.I.G. rebounded sharply after speculation arose that the Fed had changed its mind, closing at $3.75 on Tuesday. They had fallen more than 60 percent earlier in the day, and have plummeted nearly 94 percent over the past 12 months.

Rumors were running wild all over Wall Street today - AIG swung from just over $1 at the open today to over $5 intraday, on nothing but bailout speculation. WaMu shares rose sharply on [apparently completely bogus] rumors that JP Morgan was in talks with WM about a possible acquisition. Interestingly, because both of these rumors served to pump up the respective stock prices, one heard no loud proclamations from the SEC's Chris "Tool of Wall Street" Cox about "cracking down on rumormongering".

Note that unlike with the government-sponsored GSEs, the "middle way" of a conservatorship is not an option with an entirely private insurance firm like AIG:

WASHINGTON, Sept 16 (Reuters) - A U.S. government source said on Tuesday that no federal agency has legal authority to place troubled insurance company American International Group Inc (AIG) under conservatorship.

Late on Tuesday, Bloomberg News reported that one option of U.S. authorities was to put AIG under control of a conservator, as the government did earlier with mortgage finance companies Fannie Mae and Freddie Mac.

Insurance companies, however, are typically regulated by states, not by federal agencies, so legal authority to put AIG under conservatorship doesn't rest with federal authorities, the source said. (Reporting by Glenn Somerville; Editing by Leslie Adler)

[ewmayer]

Found this spare, yet elegantly functional model on eBay - do you think I paid too much?

[jrk]

Originally Posted by ewmayer

Found this spare, yet elegantly functional model on eBay - do you think I paid too much?

Yes.

But good job on the -16 seconds snipe.

[Xyzzy]

We use a 7 second snipe window. Anything less is too unreliable.

http://www.auctionsniper.com/

It is a lot of fun perusing other people's auction purchases. Apparently Ernst has a polo shirt fetish.

[only_human]

Originally Posted by ewmayer

Found this spare, yet elegantly functional model on eBay - do you think I paid too much?

Hard to value things like this. Are you intending to get the khaki one too?
New BEAR STEARNS Khaki Baseball CAP rare hat tan Lehman

[ewmayer]

Originally Posted by only_human

Hard to value things like this. Are you intending to get the khaki one too?
New BEAR STEARNS Khaki Baseball CAP rare hat tan Lehman

Dunno - the cuddly stuffed "Bankruptcy Bear" seems like it might be fun ... "complete with government bailout request!"

[only_human]

Originally Posted by ewmayer

Dunno - the cuddly stuffed "Bankruptcy Bear" seems like it might be fun ... "complete with government bailout request!"

I like the bear that shrewdfool is selling that he received as an employee when he gave blood. It sat on his desk since then. Hope he has a desk somewhere now.

[ewmayer]

Fed Repaid JPMorgan $87 Billion for Lehman Financing

The New York Federal Reserve intervened aggressively to shore up the U.S. financial system this week, providing at least $87 billion to help underpin trades with bankrupt Lehman Brothers, court documents show.

The Fed's action is the latest sign of how U.S. authorities have been seeking to prop up financial markets following the failure of Lehman and as big insurer American International Group

While the government had pledged not to fund a rescue of Lehman, the disclosure Tuesday showed authorities that were taking other financial steps to prevent markets from descending into chaos.

JPMorgan Chase advanced $87 billion to Lehman on Monday to help clear and facilitate securities transactions with customers and clients of Lehman "to avoid disruption of financial markets," according to documents filed in the U.S. Bankruptcy Court for the Southern District of New York.

Lehman and the New York Fed had requested the advance, known as a "commencement date advance" and the New York Fed repaid it, according to filings. In effect, the New York Fed lent Lehman the funds.

A representative for the New York Fed declined to comment.

"This expansion of the Fed's credit program is unprecedented," said David Pauker, a managing director with restructuring adviser Goldin Associates.

Translation: "Unprecedented " is polite language for "illegal".

"It should provide the liquidity necessary to facilitate the sale of Lehman's core brokerage and banking business." That sale appeared closer Tuesday, as a source said Britain's Barclays had agreed to buy Lehman's core broker-dealer business for about $2 billion.

Lehman's holding company filed for bankruptcy in the early hours of Monday, in the largest U.S. bankruptcy ever.

On Sunday, the Federal Reserve said it would accept a wider range of collateral, including equities, from investment banks seeking central bank loans in an effort to help keep markets functioning.

The latter is also illegal, because it violates both the letter and he spirit of the Federal Reserve act. Not that Bernanke, Paulson et al care about legality anymore ... after Congress did little but ruffle its feathers a bit in the wake of the [also illegal] Bear Stearns takeunder and then gave Paulson a free pass to bail out the GSEs [the infamous "Paulson Bazooka"], it was pretty clear that legality was the least of Washington's concerns here.