AIG and DAN Dive Insurance?

[Randy43068]

I don't have any problem with greed, or profit. I do have a problem with poor judgment and taking too much of a risk.

Thanks for your post John B.

 

[DandyDon]

then I wont chime in... (I work on wall street, the AIG ofice is next door to my building)

They decided to leave it open? I thot leave it in a diving forum to show it answered, but - ok...?

 

[jpcpat]

So why is AIG worth saving but Lehman isn't? Why was Chrysler worth saving but Enron and Worldcom weren't? Why is the government even in the business of picking winners and losers? Which of the next few potential bankruptcies will the Fed prop up (and with our own money don't forget) and which ones will be allowed to fail? Is this a free market economy or is it not? These are important questions to taxpayers and extremely important shareholders of these companies (and most mutual funds have at least some, if not all, of these stocks in their portfolios).


Actually, I don't think that the fed was picking winners and losers so much as averting disasters. AIG filing for bankruptcy would have crashed the Insurance and mortgage industries, and not just in the US. They are really the 800 lb gorilla in the room. Ditto for FNMA and FMAC. When all is said and done, I wonder just how much of the mortgage market will be controlled by the fed.

 

[Butch103]

Why not discuss it? Here or anywhere. I am looking at many of the poster's sigs with all kinds of political ads attached, to me not much difference really. Discussing current events affects us all. I'm a Canadian, so my interest in the US presidential race is strictly from the outside looking in...interesting time coming in November!

AIG has far reaching fingers outside of the US and if they were to go under the number of different jurisdictions <SP> outside of the US in which they would have to file for bankruptcy would make the settling of the company near impossible.

Also the bulk of the AIG holdings are sound operating companies. I believe AIG's assets outweigh the exposure to the subprime mortgages.

Lehman's exposure was limited to the US so to save the co was not as crucial.

All this does in no way reduce the harm to individuals who have now lost their jobs and careers.

Remember the subprime loans that are the root of the mess in the financials comes from the desire of the "common" man wanting to get into the housing market "cheaply" and with little or no credit history or ability to repay above the min required. Leveraged to the max. We can lay blame where we like, however I believe the current US adminstration is working to keep things from going on a complete meltdown.........

Cheers all!

 

[vladimir]

I was listening to the AIG thing being discussed yesterday on the Marketplace public radio program, and what I gathered from the report is that, while everyone keeps calling AIG an "insurance company", it really is a company with two main arms: insurance and investments.

The distinction between insurance and investments is tenuous in this case. The investments that were instrumental in AIG's demise were credit default swaps: essentially insurance against default sold to bondholders and speculators.

 

[vladimir]

I don't have any problem with greed, or profit. I do have a problem with poor judgment and taking too much of a risk.

One of the problems on Wall Street is that what may be poor judgment from the perspective of shareholders, bondholders, and the general public may be perfectly good judgment from the perspective of a trader or a CEO. A trader's or, by extension, a CEO's deal might be something tantamount to "heads I win 5%, tails you lose." Given that proposition, why not bet a billion dollars? If things work out, you're up $50 million; if they don't, the shareholders, the bondholders (maybe), and the other taxpayers have a problem. Of course, it is the responsibility of shareholders and their representatives on the board to safeguard their own interests, but who safeguards the general public?

 

[drbill]

Remember the subprime loans that are the root of the mess in the financials comes from the desire of the "common" man wanting to get into the housing market "cheaply" and with little or no credit history or ability to repay above the min required. Leveraged to the max. We can lay blame where we like, however I believe the current US adminstration is working to keep things from going on a complete meltdown.........

Cheers all!

True, the blame does fall to a great degree there... on the thinking that you can get something for nothing. But it also rests with the loan originators who took unwarranted risk in selling mortgages because they didn't have to carry the paper themselves and shoulder the consequences.

The goal of increasing home ownership was indeed part of this whole mess. There were a lot of people who should have given far more thought to one of the most major decisions in their life. Many were seduced by false claims.

I didn't even take Economics 1 in college and I could tell the difference. You can't put lipstick on a pig...

 

[John_B]

Actually, I don't think that the fed was picking winners and losers so much as averting disasters. AIG filing for bankruptcy would have crashed the Insurance and mortgage industries, and not just in the US. They are really the 800 lb gorilla in the room. Ditto for FNMA and FMAC. When all is said and done, I wonder just how much of the mortgage market will be controlled by the fed.

Then tell me why the default swap derivatives were deregulated? If they are that critical to the US and world economy? Obviously AIG was selling derivatives without being even close to properly capitalized for the true underlying exposure. That tells me they either didn't understand the business they were in or that they were OK with flying naked. If its the later, then they left the US taxpayer holding the bag while personally profiting themselves.

In the end, what is happening is that the Fed is deciding (again, with our money) that the economy can't take an AIG/FNMA/FMAC bankruptcy, but that ENE/WCOM/LEH bankruptcies are "survivable". That is, by definition, picking winners and losers. And don't think for a minute that the disaster is narrowly adverted, WaMu is probably next and there are more down the line.

At the end of the day, there would be a great hue and cry if a Democrat de-privatized the entire mortgage industry. There should be an equal hue and cry when a Republican does it. Even if it's done in the midst of a financial crisis. As taxpayers and voters, our representatives owe us at least that much.

 

[vladimir]

But it also rests with the loan originators who took unwarranted risk in selling mortgages because they didn't have to carry the paper themselves and shoulder the consequences.

I disagree, sort of. The burden of responsibility for assessing the risk in a bond falls on the buyer. To the extent that loan originators deceived the buyers (and rating agencies), they are to blame. And to the extent that rating agencies did not do their due diligence, they are to blame. But most of the bonds that are spiraling downwards were packaged, sold, and bought in good faith. Unfortunately, the buyers did not gauge the risks of a systemic decline in liquidity, relying instead on limited models of default risk.

 

[vladimir]

Then tell me why the default swap derivatives were deregulated?

I doubt they were ever regulated.

If they are that critical to the US and world economy?

Credit default swaps aren't inherently critical to anything. I do think they became critical to the US and World economies after trillions of dollars of exposure across hundreds of financial institutions and dozens of countries was created.

Obviously AIG was selling derivatives without being even close to properly capitalized for the true underlying exposure. That tells me they either didn't understand the business they were in or that they were OK with flying naked. If its the later, then they left the US taxpayer holding the bag while personally profiting themselves.

I agree with all of this analysis. While there is a clamor for more regulation, I am not sure that is the solution. As a trader I can attest to the mountain of regulation I am under, and it is a real expense to the industry. I think a broad mandate to a central regulator, rather than a hodgepodge of new edicts from a Congress looking to appear responsive, could address the problem effectively. Transparency and centralized clearing of derivatives is long overdue. With exchange-listed derivatives the counterparty risk is diffused across the whole market, so if somebody goes broke, you can let them go broke without systemic risk. Margining is also transparent and constant, so leverage can't easily spiral out of control.

At the end of the day, there would be a great hue and cry if a Democrat de-privatized the entire mortgage industry. There should be an equal hue and cry when a Republican does it. Even if it's done in the midst of a financial crisis. As taxpayers and voters, our representatives owe us at least that much.

I agree. It has laid bare the flaws in the almost religious adherence to laissez-faire in our financial markets, which has the appeal of simplicity and purity, but is ultimately naive outside the classroom.