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The Company Responsible For The 2008 To Big To Fail Recession - sivil - 07-11-2019





The collapse and near-failure of insurance giant American International Group (AIG) was a major moment in the recent financial crisis. AIG, a global company with about $1 trillion in assets prior to the crisis, lost $99.2 billion in 2008. On September 16 of that year, the Federal Reserve Bank of New York stepped in with an $85 billion loan to keep the failing company from going under.


Because AIG’s near-failure was a prominent and iconic event in the financial crisis, it provided a touchstone for subsequent financial reform discussions, and a great deal of information about AIG and the rescue is in the public domain. Both the Congressional Oversight Panel and the Financial Crisis Inquiry Commission produced detailed reports that included accounts of AIG, and the Federal Reserve Bank of New York made public a detailed account of its involvement.
Nevertheless, many of us—economists included—remain fuzzy about what happened. How, exactly, did AIG get to the point of failure? In a recent paper, Robert McDonald, a professor of finance at the Kellogg School of Management, and Anna Paulson of the Federal Reserve Bank of Chicago, pull together disparate data and information to create an economic narrative of what went wrong.

[Image: aig-bailout-infographic.jpg]

“AIG is a mystery to a lot of people and it’s very complicated,” McDonald says. “There were multiple moving parts.”
The company’s credit default swaps are generally cited as playing a major role in the collapse, losing AIG $30 billion. But they were not the only culprit. Securities lending, a less-discussed facet of the business, lost AIG $21 billion and bears a large part of the blame, the authors concluded.
What’s more, McDonald and Paulson examined the assertion that the mortgage-backed securities underlying AIG’s transactions would not default. “After the crisis, there was a claim that these assets had been money-good,” meaning they were sound investments that may have suffered a decline in the short term but were safe overall, McDonald says. “I was deeply interested in learning whether that was true.”

Risky Credit Default Swaps
Most of the post-mortems of AIG focus on its selling of credit default swaps, which are financial instruments that act like insurance contracts on bonds. In these transactions, the insurance seller (in this case, AIG) in some ways becomes the bond owner.
“Think about home insurance,” McDonald says. “If you’ve sold insurance on a house, and the house burns to the ground, you have to pay. The insurance seller has the same risk as an uninsured homeowner.” Likewise, if the bonds AIG insured did not pay out, the company was on the hook for those losses.
Over the course of these agreements, the value of the underlying asset will change, and one party will pay the other money, called collateral, based on that change; that collateral can flow back and forth between the two parties as the market moves. AIG’s credit default swaps did not call for collateral to be paid in full due to market changes. “In most cases, the agreement said that the collateral was owed only if market changes exceeded a certain value or if AIG’s credit rating fell below a certain level,” McDonald says.

[Image: chart-of-the-day-aig-bailout.gif]

AIG was accruing unpaid debts—collateral it owed its credit default swap partners, but did not have to hand over due to the agreements’ collateral provisions. But when AIG’s credit rating was lowered, those collateral provisions kicked in—and AIG suddenly owed its counterparties a great deal of money.
On September 15, 2008, the day all three major agencies downgraded AIG to a credit rating below AA-, calls for collateral on its credit default swaps rose to $32 billion and its shortfall hit $12.4 billion—a huge change from $8.6 billion in collateral calls and $4.5 billion in shortfall just three days earlier. While this debt kicked in automatically because of the provisions in AIG’s agreements, rather than the willful terminations of its securities lending agreements, “it’s still a little like a bank run, in the sense that all of a sudden you’re in trouble, and the fact that you’re in trouble means you get a big call on your assets,” McDonald says.
AIG had written credit default swaps on over $500 billion in assets. But it was the $78 billion in credit default swaps on multi-sector collateralized debt obligations—a security backed by debt payments from residential and commercial mortgages, home equity loans, and more—that proved most troublesome. AIG’s problems were exacerbated by the fact that these were one-way bets. AIG didn’t have any offsetting positions that would make money if its swaps in this sector lost money.

Cite: https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig

There's nothing fundamentally wrong with the core insurance business units of American International Group Inc. (AIG). Nothing at all. What imploded the venerable insurance giant was an accumulation of misplaced bets on credit default swaps.
By the best estimates of the International Swaps and Derivatives Association and the Bank for International Settlements (BIS), often referred to as the central banks' central bank, the notional value of credit default swaps out in the market place is some $62 trillion, or 35 trillion British Pounds at an exchange rate of $1.78.
A credit default swap (CDS) is akin to an insurance policy. It's a financial derivative that a debt holder can use to hedge against the default by a debtor corporation or a sovereign entity. But a CDS can also be used to speculate.
A subsidiary of AIG wrote insurance in the form of credit default swaps, meaning it offered buyers insurance protection against losses on debts and loans of borrowers, to the tune of $447 billion. But the mix was toxic. They also sold insurance on esoteric asset-backed security pools – securities like collateralized debt obligations (CDOs), pools of subprime mortgages, pools of Alt-A mortgages, prime mortgage pools and collateralized loan obligations. The subsidiary collected a lot of premium income and its earnings were robust.

[Image: Government-bailouts-w-title.gif]

When the housing market collapsed, imploding home prices resulted in precipitously rising foreclosures. The mortgage pools AIG insured began to fall in value. Additionally, the credit crisis began to take its toll on leveraged loans and it saw mounting losses on the loan pools it had insured. In 2007, the company was starting to feel serious heat.
From its humble beginnings in China in 1919 – through the 40-year tenure of CEO Maurice R. "Hank" Greenberg, which ended ignominiously for Greenberg in 2006 – AIG grew aggressively. Greenberg grew and diversified the insurance giant, ultimately amassing a trillion-dollar balance sheet.
But not everything was Kosher.

In an effort to assuage analysts and maintain leverage, the firm entered into sham transactions to affect the appearance on its balance sheet of $500 million of loan-loss reserves, which analysts had been questioning as formerly declining. The result was a 2006 Securities and Exchange Commission enforcement action, a $1.6 billion settlement and the removal of Greenberg. Greenberg is still fighting civil charges related to his actions at the firm.
As 2007 progressed, so did the losses on AIG's books and credit default swaps. Once again, it appears that AIG tried to "manage" the problem through accounting maneuvers. Last February, for instance, AIG said that "its auditor had found a material weakness in its accounting." It had not been properly valuing its CDO liabilities and swap-related write-downs. The losses were revealed to be in excess of $20 billion through this year's first quarter. The SEC is once again investigating, as are criminal prosecutors at the U.S. Justice Department and the U.S. Attorney's Office in Brooklyn.

After writing down assets against gains elsewhere, AIG posted cumulative losses of $18 billion over the last three quarters. In February, AIG posted $5.3 billion in collateral against credit default swap contracts it had written. In April, AIG had to post an additional $4.4 billion in collateral. When rating agencies Standard & Poor's, Moody's Investors Service (MCO) and Fitch Ratings Inc., lowered the firm's ratings last Monday evening, it triggered an additional $14 billion collateral call as margin against AIG's credit default swaps.
The company didn't have the cash.
Indeed, the dire need for cash collateral on top of mounting losses on warehoused CDO "assets" on the company's balance sheet necessitated a massive infusion of capital. That's what happened to AIG.

Cite: https://moneymorning.com/2008/09/23/credit-default-swaps-3/


RE: The Company Responsible For The 2008 To Big To Fail Recession - Arkansas_Ted - 07-11-2019

My parents lost roughly 350.000 in the 2003 and 638.000 in the 2008 manufactured crisis. Did that stop my mother who watched the ticker tape while watching her soap operas> NO. Dad still preserved his retirement from age 58 and my Mother whom we lovingly call the Mafia-Dudette rolled on. She stopped playing the market at age eighty. She said she doesn't trust herself because they have change the language and tactics. My brothers and I miss her beating us with a broom. She spanks my ass after greets every time I see them on the farm. She always says, I know you have been bad. LMAO. My wife and her are two pees in a pod. Good American women drowned in heathen men.


RE: The Company Responsible For The 2008 To Big To Fail Recession - sivil - 07-11-2019

(07-11-2019, 07:34 PM)Arkansas_Ted Wrote: My parents lost roughly 350.000 in the 2003 and 638.000 in the 2008 manufactured crisis. Did that stop my mother who watched the ticker tape while watching her soap operas> NO. Dad still preserved his retirement from age 58 and my Mother whom we lovingly call the Mafia-Dudette  rolled on. She stopped playing the market at age eighty. She said she doesn't trust herself because they have change the language and tactics. My brothers and I miss her beating us with a broom. She spanks my ass after greets every time I see them on the farm. She always says, I know you have been bad. LMAO. My wife and her are two pees in a pod. Good American women drowned in heathen men.

Thats a good story @Arkansas_Ted and don't worry we are all probably heathens anyway!


RE: The Company Responsible For The 2008 To Big To Fail Recession - WNC - 07-11-2019

(07-11-2019, 07:34 PM)Arkansas_Ted Wrote: My parents lost roughly 350.000 in the 2003 and 638.000 in the 2008 manufactured crisis. Did that stop my mother who watched the ticker tape while watching her soap operas> NO. Dad still preserved his retirement from age 58 and my Mother whom we lovingly call the Mafia-Dudette  rolled on. She stopped playing the market at age eighty. She said she doesn't trust herself because they have change the language and tactics. My brothers and I miss her beating us with a broom. She spanks my ass after greets every time I see them on the farm. She always says, I know you have been bad. LMAO. My wife and her are two pees in a pod. Good American women drowned in heathen men.

Yeah I lost over $300,000 back then. It was my own damned fault, I trusted my investment people


RE: The Company Responsible For The 2008 To Big To Fail Recession - Arkansas_Ted - 07-11-2019

(07-11-2019, 08:14 PM)WNC Wrote:
(07-11-2019, 07:34 PM)Arkansas_Ted Wrote: My parents lost roughly 350.000 in the 2003 and 638.000 in the 2008 manufactured crisis. Did that stop my mother who watched the ticker tape while watching her soap operas> NO. Dad still preserved his retirement from age 58 and my Mother whom we lovingly call the Mafia-Dudette  rolled on. She stopped playing the market at age eighty. She said she doesn't trust herself because they have change the language and tactics. My brothers and I miss her beating us with a broom. She spanks my ass after greets every time I see them on the farm. She always says, I know you have been bad. LMAO. My wife and her are two pees in a pod. Good American women drowned in heathen men.

Yeah I lost over $300,000 back then. It was my own damned fault, I trusted my investment people

That is what my mother and father said as well. She got all sassy and took control. They recovered well for dumb old Arkansas Hillbillies.


RE: The Company Responsible For The 2008 To Big To Fail Recession - Deplorably Nameless - 07-12-2019

Near failure?

AIG collapsed after the bailout because the executives took the bailout money and ran.


RE: The Company Responsible For The 2008 To Big To Fail Recession - Deplorably Nameless - 07-12-2019

Gmc was on the verge of collapsing too...but obama bailed them out.
I'm not sure they payed us back.

The airlines were also bailed out by the American taxpayers.

In the airline case, they didn't pay anything back and they were taken over by the gov...

All this technically means that the US taxpayers should be shareholders and board members of said bailed out companies...but instead we were treated like old west banks that were robbed and not ever paid back.

Speaking of banks...we bailed them out too!