0
Gawain

Now the Government is to Save AIG

Recommended Posts

Quote

Those are all interesting questions, imo -- how have the incentives and disincentives (1) to risk, (2) to shifting risk, and/or (3) to not revealing/intentionally hiding risk in the mortgage & insurance sector changed? Why? If the information on which an insurance company assesses risk is incomplete or in error how is liability distributed? Who has benefited?

VR/Marg



In the mortgage sector, sub-prime mortgages have motivated misrepresentation of risk of the securities backed by those mortgages. Many would argue that there needs to be more oversight/regulation of rating agencies. Personally, I agree. I suspect we will see, within the next year or two, new legislation for rating agencies analogous to Sarbanes-Oxley.

Unfortunately, the consumers/taxpayers will end up assuming the costs associated with the misguided investments (regardless of who was responsible for the misguidance) whether the government bails out companies or not, via taxes or price increases. At least with a government bailout, there is a reasonable chance that the government will ultimately profit from their investment when they eventually sell their shares of the companies they bailed out.

If insurance risks are assessed incorrectly, either the policy holders or the policy issuers (and their reinsurers) benefit, depending on the nature of the error. Insurance companies transfer much of their risk to reinsurers, and reinsurers often retransfer much of that risk to other reinsurers, a process known as retrocession. That spreads the risk pretty well, as long as insurance companies do not inadvertently reassume their own risk as retrocessionaires.
Math tutoring available. Only $6! per hour! First lesson: Factorials!

Share this post


Link to post
Share on other sites
Here's what I don't understand.

For starters, AIG appears to have lost ~89% of its value in the last couple days, going from nearly $18/share to ~$2/share. To me, that says that its value was imaginary. That is, there was no real tangible or intellectual property associated with the supposed value of the stock.

The problem is this all relates to the housing bubble and mortgage meltdown, right? And no matter how I split loans up in my head, they still fundamentally tie back to real, tangible property. Sure, some loans were on over-valued properties, and the downturn has magnfied this effect, but what bank or borrower initiates loans worth 5 times the collateral associated with those loans? If AIG bought a ton of mortgage backed securities, and ALL those mortgages went into default and ALL of those loans were on property worth only half of the loaned amount, shouldn't AIG suddenly own an awful lot of houses worth approximately 50% of the debt they incurred on such investments? This is the part I don't understand. How does real property translate into imaginary value?

Blues,
Dave
"I AM A PROFESSIONAL EXTREME ATHLETE!"
(drink Mountain Dew)

Share this post


Link to post
Share on other sites
Quote

How does real property translate into imaginary value?




Through the deregulation via the Commodity Futures Modernization act and the Gramm-Leach-Bliley Act, for starters. The former allowed banks to divorce themselves of the originating loan and engage in swapping. (I'm not sure if the bundling of loans into commodities was a part of the act but it that's what happened). And the latter allowed the merger of banks, insurers and stock brokers. In short, they let "the market sort it out", until now.

Share this post


Link to post
Share on other sites
Quote

More details came out today, apparently this is a two-year loan and AIG will pay back with interest. The company's assets are collateral against the loan. I still don't like it, but it's a better situation than what we're on the hook for with Fannie/Freddie...:S



The Fannie and Freddie bailouts are similar loans. Current stockholders will assume more risk than taxpayers. From NPR:

Paulson said the rescue effort was "structured very carefully to protect the taxpayers." If taxpayer dollars are used for the purchase of preferred stock, then "first losses will be borne by the existing shareholders," he said. But if the housing market continues to deteriorate, taxpayers could be on the hook. The Congressional Budget Office has estimated that a bailout of Fannie and Freddie could cost from $0 to $100 billion, with the most likely amount being $25 billion.

Math tutoring available. Only $6! per hour! First lesson: Factorials!

Share this post


Link to post
Share on other sites
Quote

Here's what I don't understand.

For starters, AIG appears to have lost ~89% of its value in the last couple days, going from nearly $18/share to ~$2/share. To me, that says that its value was imaginary. That is, there was no real tangible or intellectual property associated with the supposed value of the stock.

The problem is this all relates to the housing bubble and mortgage meltdown, right? And no matter how I split loans up in my head, they still fundamentally tie back to real, tangible property. Sure, some loans were on over-valued properties, and the downturn has magnfied this effect, but what bank or borrower initiates loans worth 5 times the collateral associated with those loans? If AIG bought a ton of mortgage backed securities, and ALL those mortgages went into default and ALL of those loans were on property worth only half of the loaned amount, shouldn't AIG suddenly own an awful lot of houses worth approximately 50% of the debt they incurred on such investments? This is the part I don't understand. How does real property translate into imaginary value?

Blues,
Dave



The stock may well currently be undervalued. Stockholder confidence is low, motivating shareholders to sell off their stock, driving the price down. While mortgage backed securities are common, the investors who purchase them typically have no desire to directly enter the real estate market with their investment. They want the mortgage payments, not the houses. In AIG's case, houses don't pay insurance benefits. Furthermore, in the current housing market, houses are not exactly easy to liquidate, especially while minimizing losses from the sales.
Math tutoring available. Only $6! per hour! First lesson: Factorials!

Share this post


Link to post
Share on other sites

A bit of a PA, wouldn't you think? I don't consume mind altering substances and don't much appreciate your implication.

Let's see...WE (the taxpayers) are bailing out the majority of business that made foolish risky decisions that have caused them to go tits up - although the executives that make the bad decisions pocket billions (collectively).
Obama promises tax cuts for all! The rich - remember those that pocketed the millions by doing a poor job to begin with - are going to make MORE bad decisions so as to pocket more millions. I see ass loads more layoffs, outsourcing, and off-shoring of jobs. He wants to target the off-shoring companies you say - geat - more H-1B visas then. :S
THEN he's going to fix the healthcare issue. :S
Oh, don't forget the NEW and IMPROVED economic stimulus idea he has.
Should be sweet.

Share this post


Link to post
Share on other sites
>Obama promises tax cuts for all!

Actually, McCain is the one promising tax cuts for all.

It is fun watching the GOP condemn Obama for proposing a tax cut. "Vote for McCain! He won't cut taxes too much, like that idiot Obama." Once again we've come full circle.

Share this post


Link to post
Share on other sites
Quote

To me, that says that its value was imaginary. That is, there was no real tangible or intellectual property associated with the supposed value of the stock.



Stock value does not represent tangible or intellectual property of a firm.

It represents the present value of its anticipated returns as agoing concern. Based on what it was doing, what it had, and what it expected to do in the following years, investors ( not little you and me investors, but majors) actually calculate what its share value should be, and can drive up or down the price of the stock by selling and buying if they see a difference.
Remster

Share this post


Link to post
Share on other sites
Quote

Quote

Here's what I don't understand.

For starters, AIG appears to have lost ~89% of its value in the last couple days, going from nearly $18/share to ~$2/share. To me, that says that its value was imaginary. That is, there was no real tangible or intellectual property associated with the supposed value of the stock.

The problem is this all relates to the housing bubble and mortgage meltdown, right? And no matter how I split loans up in my head, they still fundamentally tie back to real, tangible property. Sure, some loans were on over-valued properties, and the downturn has magnfied this effect, but what bank or borrower initiates loans worth 5 times the collateral associated with those loans? If AIG bought a ton of mortgage backed securities, and ALL those mortgages went into default and ALL of those loans were on property worth only half of the loaned amount, shouldn't AIG suddenly own an awful lot of houses worth approximately 50% of the debt they incurred on such investments? This is the part I don't understand. How does real property translate into imaginary value?

Blues,
Dave



The stock may well currently be undervalued. Stockholder confidence is low, motivating shareholders to sell off their stock, driving the price down. While mortgage backed securities are common, the investors who purchase them typically have no desire to directly enter the real estate market with their investment. They want the mortgage payments, not the houses. In AIG's case, houses don't pay insurance benefits. Furthermore, in the current housing market, houses are not exactly easy to liquidate, especially while minimizing losses from the sales.



I believe that the opaque nature of many of the derivatives, loan swaps and other instruments dreamed up by the whiz kids makes it difficult to know with any certainty the real magnitude of the problems in the financial sector.
...

The only sure way to survive a canopy collision is not to have one.

Share this post


Link to post
Share on other sites
Quote

A bit of a PA, wouldn't you think? I don't consume mind altering substances and don't much appreciate your implication.



I just seems to me that you mentioned Obama in a thread where it simply does not relate to him it actually relates to the other party! That’s like trying to blame him for the Iraq War.

I am begning to think a lot of people are on Mind altering drugs because I simply do not understand that logic.



Also what Obama said makes since to me.

We have a huge deficit and need money to solve many issues, not to mention the huge mismanagement and down right fraud this administration has been plagued with.

The money ahs to come from somewhere.

He said his plane is to raise the tax on the top 5% it is a better idea then taxing the middle class.

I can understand that.

As person taking home 250,000 might have to sacrifice a small luxury while a middle class family might have to sacrifice there heating bill, or home.

If a sacrifice needs to be made it makes since for me that it would be someone not buying a golden toilet then a family going Hungary.

To me that makes sense if those are my choices.


My personal belief is government should stay put of business (what the republicans claim but never do), but if I have to choose between my tax dollars helping a CEO or an average citizen I know where I stand.
I'd rather be hated for who I am, than loved for who I am not." - Kurt Cobain

Share this post


Link to post
Share on other sites
I'd forgotten to mention the insurance aspect in my question, but no matter. I did get another reply by PM, the author of which does not mind my posting it, but does want to remain anonymous. It alludes to some concerns I share despite being from a very different perspective.

Quote

Hey Dave,
I follow Speaker Corner and I'm amused to see some of the comments esp from staunch capitalists who see nothing wrong with taxpayers bailing out Wall St! For full disclosure - I'm a banker on Wall Street and I think the bailout is disgusting.

The reason AIG is on the hook is this:

Over the past few years, the mortgage machine, goosed by low interest rates in response to the dot com bust, originated tons of new mortgages. The model was - mortgage originators representing lenders such as Countrywide, New Century etc. would originate loans and take a cut (these were the d-bags driving around So-cal in flashy cars). Since their incentive was tied to volume, they pushed out as much money as they could.

But what about the lenders? They took these mortgages (i.e. money that homeowners owed them), and sold them to Wall St. trading desks who packaged them up into RMBS securities. The securities original design was intended to create "slices" of risk and sell them to those who wanted it. The most risk-averse (like banks and pensions) would only buy the lowest risk debt - rated AAA by the rating agencies. The riskier chunks had a harder time finding a home. There entered the CDO - another instrument which took these lower-rated, riskier chunks and further sliced them up into "slices" of risk. The AAA rated slices of these assets went to risk-averse banks and ...

So you now had a machine where cheap money was fueling investments in real-estate. This caused real-estate prices to rise, mitigating the effect of homeowners defaulting (if I defaulted on my mortgage, my house would sell for a higher price than the loan and the lender would not take a loss), thereby encouraging more risk-taking. It's like a positive feed back loop.

Where was AIG in all this? Well, the investors in AAA bonds weren't entirely clueless, they knew there was a reason these bonds yielded .25% over equivalent treasuries. So they bought insurance. From AIG.

When the party came to a halt in 2007, most institutions started taking losses and marking down their assets. AIG and others miscalculated that the market would recover (or realized they were fucked and chose to hold out for as long as they could). As the economy continued to deteriorate, AIG's position as guarantor on these assets become weaker - no one wants their insurer to default and not pay. AIG's insurance policies called for them to pledge cash-like assets if they were downgraded. The amount of these pledges is huge given how much AIG had guaranteed. When they came due, AIG was in effect at the mercy of their creditors. In effect, they were on the hook for the losses of their policy holders. This is the exact trade that wiped out the monoline insurers. Why is everyone so suprised that it took out AIG? (ref XL, FGIC, ACA, CIFG, MBIA, Ambac ...)

At this point, if AIG had defaulted, their policy holders - i.e. Wall St banks would've been well and truly fucked. The markets would most certainly have crashed. Ergo you have the Fed panicking and bailing them out with taxpayer money.

In addition to all this, AIG as a insurer has to invest premiums (from their more traditional businesses like life insurance) in "safe" assets. They probably had a bunch in AAA CDOs through this route also.

What is shocking to me is that they had 6 months (after Bear Stearns) to get their act together and arrange a rescue for themselves. Instead, they bet they were too big to fail, they turned out to be right and the Fed has bailed them out at taxpayer expense. Secondly, to not recognize that you have a potential $85B liability coming due is close to fraudulent, pointing to accounting manipulations over the past year or two to avoid the day of reckoning. At the very least it's criminal incompetence!

As to why AIG doesn't then end up owning a bunch of foreclosed homes, it's because they didn't buy the houses directly. They bought (or sold protection on - which is the same thing) a stream of cash flows off of these properties. They probably will have some claim to the assets via a long chain of intermediaries, but it will not be anywhere near enough to compensate them for these losses.

Anyhow, as someone on the inside, I am very concerned that the US economy is truly fucked for a while. The old advice of "buy and hold" the market will recover is no longer true in my mind (unless you have a really long horizon).

While government has little control of how the economy behaves, it does have control on its own expenditure. The Fed is looking to the Treasury since the Fed has used up over 50% of their holdings in these bailouts (with more to come). And thanks to Iraq and other boondoggles, it will be that much harder for the US Govt to keep borrowing from China and the rest of the world. This may be a turning point in US and world history.

Sorry for the rambling email! Hope this helps :)



Blues,
Dave
"I AM A PROFESSIONAL EXTREME ATHLETE!"
(drink Mountain Dew)

Share this post


Link to post
Share on other sites
Quote

A bit of a PA, wouldn't you think? I don't consume mind altering substances and don't much appreciate your implication.

Let's see...WE (the taxpayers) are bailing out the majority of business that made foolish risky decisions that have caused them to go tits up - although the executives that make the bad decisions pocket billions (collectively).
Obama promises tax cuts for all! The rich - remember those that pocketed the millions by doing a poor job to begin with - are going to make MORE bad decisions so as to pocket more millions. I see ass loads more layoffs, outsourcing, and off-shoring of jobs. He wants to target the off-shoring companies you say - geat - more H-1B visas then. :S
THEN he's going to fix the healthcare issue. :S
Oh, don't forget the NEW and IMPROVED economic stimulus idea he has.
Should be sweet.



"We cannot have the taxpayers bail out AIG or anybody else,'' John McCain, Today Show, Sept 16, 2008

Yep - he sure got THAT right.
...

The only sure way to survive a canopy collision is not to have one.

Share this post


Link to post
Share on other sites
Quote

Hey, nationalization has worked out so well everywhere else...




Really? Where has it failed, esp contemporarily? Socialist nations are kicking our asses in quality of life, healthcare, value of currency, etc..... There is a balance and this free-market concept has failed.

Share this post


Link to post
Share on other sites
Quote

Quote

Hey, nationalization has worked out so well everywhere else...




Really? Where has it failed, esp contemporarily? Socialist nations are kicking our asses in quality of life, healthcare, value of currency, etc..... There is a balance and this free-market concept has failed.



Are you serious? What socialist nation has a better quality of life than us? I lived in Sweden for two years. Very nice country but all socialism does is take from the rich and give to the poor. There is no reason or desire for people to succeed because they know the government will pay their rent if they can't.

Capitalism has not failed but the collapse of AIG and Lehman has shown the main weakness of capitalism which is Greed. Greed is what has driven AIG into the ground.
The most terrifying words in the English language are: I'm from the government and I'm here to help.

Share this post


Link to post
Share on other sites
Quote

The architects of this fiasco, if still employed by AIG, just lost a shitload of money in their stocks. Most of these cats gets their salaries in stocks. If the company does well, the stocks do well, so they do well.

I suspect there will be a lot of higher-end property foreclosures coming soon..


On another note, the loan will give the feds a 79.9 percent interest in AIG. There are a couple of thoughts here. The first is that the Feds are playing the stock market - buying up bargain stocks. Which to me is what th emarket is about. (Of course, doign so crowded out bargain investors like me, who were ready to pounce).

The other thought is - this is socialism. Perhaps it is a worhty experiment to see how the company performs in the long run. That way, we can see whether social health care will work. HA HA HA HA HA!!!!




This isn't socialism, the gov is protecting people of wealth, so if it is socialism it is corp welfare, not the conventional, poor-based welfare that you want to coincide it with.

Just as with the post-911 financing of the airlines with no requirment to maintain employees, this corporate gift is for the rich not for the poor, so try to keep your hate for the poor classified.

Share this post


Link to post
Share on other sites
Quote

Quote

Not changing a fucking thing ought to work just great.




And what would you change at this moment? All the regulation in the world cannot stop management from making bad decisions and driving a company into the ground. I am just pissed they use tax dollars to save them before they go splat!>:(



They're not using tax dollars, they're writing rubber checks, just like with military operations and Iraq.

Share this post


Link to post
Share on other sites
ME: Socialist nations are kicking our asses in quality of life, healthcare, value of currency, etc.....


AWL71: Are you serious? What socialist nation has a better quality of life than us? I lived in Sweden for two years. Very nice country but all socialism does is take from the rich and give to the poor. There is no reason or desire for people to succeed because they know the government will pay their rent if they can't.




I don't know how you quantify quality of life and it is generally subjective anyway. So I see you have acquiesced on teh others; healthcare and value of currency. Those are part of quality of life, IMO.


>>>>>>>>>>>>>>Capitalism has not failed but the collapse of AIG and Lehman has shown the main weakness of capitalism which is Greed. Greed is what has driven AIG into the ground.


If we pick our heads up and look at all fiscal indicators we see that the debt is 10T and class seperation is gross, so yes, our economic system has failed, we're now just waiting to hit the ground.

Share this post


Link to post
Share on other sites
Quote

they are not better with health care or quality of life. Maybe you should ask some Canadians about health care and some Balkans about quality of life.



The US has the most expensive health care, per capita, in the world. Our quality of healthcare is nowhere near the top of the list among developed nations.
Math tutoring available. Only $6! per hour! First lesson: Factorials!

Share this post


Link to post
Share on other sites
Quote

Capitalism has not failed but the collapse of AIG and Lehman has shown the main weakness of capitalism which is Greed. Greed is what has driven AIG into the ground.



Greed is the motivating force of capitalism.
Math tutoring available. Only $6! per hour! First lesson: Factorials!

Share this post


Link to post
Share on other sites
Quote

Quote

they are not better with health care or quality of life. Maybe you should ask some Canadians about health care and some Balkans about quality of life.



The US has the most expensive health care, per capita, in the world. Our quality of healthcare is nowhere near the top of the list among developed nations.



Quote

Link

In the 1970s, Great Britain invented the CT scanner, and for some period of time exported more than half the CT scanners used in the world. But today it has half the number of CT scanners per capita than we have in the United States. Canada faces similar problems with CT scanner shortages.

Canada and the UK suffer from other similar shortages compared to the U.S. "Among people with chronic renal failure, only half as many Canadians as Americans get dialysis, and only a third as many Britons on a per capita basis," writes John Goodman of the National Center for Policy Analysis, who spent more than two decades analyzing the performance of world health care systems. "The American rate of coronary bypass surgeries is three or four times what it is in Canada, and five times what it is in Britain."

Statistics compiled by the Paris-based Organization for Cooperation and Development (OECD) in June 2007 show that the United States compares very well with 11 other industrialized countries in the numbers of MRI units and CT scanners per one million people: The United States, with 32 CT scanners and 26 MRI units, led virtually every other nation (with the exception of Japan) in almost every category.

An article published last year in the British medical journal The Lancet strongly suggests that the United States is also outperforming the world when it comes to surviving diseases such as AIDS, heart disease, cancer, and pneumonia. For example, approximately 63 percent of Americans diagnosed with cancer survive for at least five years. This tops the survival rates in countries with state-run national health care, including Italy, Spain and Great Britain.

It is often argued that countries with state-run health care outpace the U.S. when it comes to ensuring access to drugs. For example, Tanner points out that only 44 percent of Americans benefit from statins, drugs which reduce cholesterol and protects against heart disease. That's bad news—until you compare it to Germany, where just 26 percent have access to statins; or Great Britain, where 23 percent get them, or Italy, where just 17 percent do.



Quote

Some Americans believe that government-run health care is right for the U.S., based upon their limited experience with the Canadian system. Indeed, if one travels north of the border, flu shots and prescription drugs are wonderfully inexpensive. But again, this a skewed picture.

What most Americans don't know is that Canadian drug prices are kept artificially low through price controls. Moreover, the U.S. health care system is a safety net for many Canadians. Indeed, they flock south of the border to obtain care that their own system denies them. Thousands of anguished Canadians have had hellish experiences getting the proper care they desire in their country's affordable health system.

Consider the example of Jane Pelton of Ottawa, whose teenage daughter Emily was told she had to wait up to three years for a government-paid operation to repair her torn knee ligament. Rather than leave Emily in pain, the family decided to pay $3,300 for arthroscopic surgery at a private clinic with no help from the government.

"It's like somebody's telling you that you can buy this car, and you've paid for the car, but you can't have it right now," said Pelton. "Every day we're paying for health care, yet when we go to access it, it's just not there."

Shockingly, the average Canadian family pays nearly half of its income in taxes each year, much of it to the health system. In 2005, the Canadian Taxpayers Federation estimated that citizens in the Ontario province were spending about 40 percent of their tax dollars on health care. By 2035, that figure could reach 85 percent.

In Alberta, a nonprofit organization called Friends of Medicare (Canada's health care system for the elderly has the same name as the American one) emphasizes problems with the U.S. health system and defends Canada's as the "most moral and the most cost effective health care system in the world," adding: "Is your sick grandkid more deserving of help than your neighbor's grandchild?"

The answer to that question is "yes," replies arthroscopic surgeon Brian Day, if the child needs urgent care and cannot get it at a government-funded hospital. Day told the Associated Press that he became so frustrated with the long delays in getting authorization to perform surgery at public hospitals in Vancouver, he built his own private clinic.

Several years ago, Day testified before Canada's Supreme Court on the myriad failings of Canada's health system. The case involved 73-year-old George Zeliotis, who suffered excruciating pain and became addicted to painkillers during a year-long wait for hip replacement surgery. His doctor, Jacques Chaouli, claimed Zeliotis' constitutional rights were violated because Quebec failed to provide the care he desperately needed. On June 9, 2005, the court ruled 4-3 in favor of Zeliotis, noting that as a result of delays in obtaining tests and undergoing surgery, patients have suffered or even died. The case was one modest step for common sense. It underscored the reality that the Canadian system can place severe limits on access to care that most Americans wouldn't tolerate.



Quote

Link

Among women who are diagnosed with breast cancer, only one fifth die in the United States, compared to one third in France and Germany, and almost half in the United Kingdom and New Zealand.
Among men who are diagnosed with prostate cancer, fewer than one fifth die in the United States, compared to one fourth in Canada, almost half in France, and more than half in the United Kingdom.


Mike
I love you, Shannon and Jim.
POPS 9708 , SCR 14706

Share this post


Link to post
Share on other sites
Quote

Quote

they are not better with health care or quality of life. Maybe you should ask some Canadians about health care and some Balkans about quality of life.





I have, I work with them. They decry our healthcare bigtime.



I'm not surprised, if they espoused anything else within earshot of you, you'd likely harrange them until they just wore down and admitted that social health care is great and the US sucks at everything.

...
Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

0