Posts filed under “Really, really bad calls”
Part III of the Washington Post series on AIG. Today’s version: Downgrades And Downfall.
Here’s an excerpt:
Once a small part of the firm’s business, the increasingly popular [credit-default swaps] contracts had helped boost the company’s profits to record levels. The company’s computer models continued to show only a minute chance that the firm would ever pay out a dime on the contracts, and it turned down deals that didn’t meet its standards. After their reviews, Cassano and his team would consult with AIG executives, sometimes including chairman and chief executive Maurice “Hank” Greenberg. “We rode pretty tight rein on them,” Greenberg recalls.
But the swaps also exposed Financial Products and its parent AIG, the global insurance titan, to billions of dollars in possible losses. By spring 2005, some Financial Products executives were questioning the surge in volume. Among them was Cassano, an early advocate for the swaps business who ran the firm from its London office.
“How could we possibly be doing so many deals?” one executive recalls Cassano asking Frost, the firm’s liaison with Wall Street dealers, during one conference call. “Dealers know we can close and close quickly,” Frost said. “That’s why we’re the go-to.”
Efficiency wasn’t the only reason. Frost didn’t have to say aloud what everyone at the firm already appreciated. Financial Products had become the “go-to” for credit-default swaps in part because of its knowledge and reliability, but also because it had AIG’s backing. The parent company’s top-drawer, Triple A credit rating and its deep pockets assured customers that they could rest easy.
Their comfort turned out to be illusory. The credit-default swaps became a primary force in the disintegration of AIG as a private enterprise and a massive government rescue aimed at preventing catastrophic damage to the world’s financial system. Never in U.S. history has the government invested so much money trying to save a private company.
The entire series is well worth your reading time . . .
Downgrades And Downfall
Robert O’Harrow Jr. and Brady Dennis
December 31, 2008; Page A01
“The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.” –Tom Savage, President, AIG’s Financial Products > The second part of the 3 part series is now posted, A Crack in The System. This section gets into the details…Read More
I am still very surprised at this: “George W. Bush remains popular among conservative Republicans (72% approve of him) despite his low overall approval rating. Meanwhile, moderate and liberal Republicans are as likely to disapprove as to approve of the job he is doing, and Democrats of all political orientations hold Bush in low regard.”…Read More
“We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy… and individual supervision and regulation of individual banks. We need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand.” -Sir…Read More
Law office: http://halestewartlaw.com/
A recent paper by the Minneapolis Federal Reserve has gotten a lot of attention. The paper is titled Facts and Myths About the Financial Crisis of 2008 and it argues there was in fact no credit crisis. Several people have used this paper to argue that Wall Street overstated the severity of the credit crisis in order to get a bail-out they didn’t need. What these commentators have failed to heed is this paper was widely criticized within the financial community, even drawing a rare rebuke from a sister Federal Reserve Bank. In short, to argue there was no credit crisis — to say we were “punked by Wall Street” — flies in the face of every available fact on the crisis.
First, let’s provide some background for this debate. As of this writing 311 lenders have “imploded.” The XLFs — the ETF that tracks the financial sector – is down almost 70% from a high in the summer of 2007. Total credit losses at the world’s financial institutions have totaled 1 trillion dollars:
The gauge is down 46 percent in 2008 as credit losses and writedowns at the world’s largest banks surpassed $1 trillion and the U.S., Europe and Japan entered the first simultaneous recessions since World War II.
In other words, the financial sector’s economic position is terrible at best.
But the evidence runs deeper. About every six weeks the Federal Reserve issues a paper titled “The Beige Book.” This is a book complied from anecdotal evidence from the Federal Reserve Districts on the general economic environment. Every Beige book issued in 2008 has indicated credit conditions were tightening and loan demand was decreasing.
“You’ve heard of mental depression; this is a mental recession,” he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. “We may have a recession; we haven’t had one yet.” “We have sort…Read More
We interrupt the GM hearings for this brief moment of schadenfreude: Harvard’s endowment has now blown through over $8 Billion, or 22% in the last four months. Correct me if I am wrong, but wasn’t Harvard’s endowment outperforming the broad indices for a long time? And didn’t their Board of Trustees fire/replace/chase awayt hese outperforming…Read More
Dennis Kneale on the Housing and Credit Crisis, June 27 2008
National Association of REALTORS®Back to the President’s Report
Voices of Real Estate
– Posted by Dick
NAR has been trying for more than a year to put the current problems in the housing market in the proper perspective, telling the media and consumers that the housing “crisis” is really an isolated problem and that we already are working to fix it.
I have to give credit to Dennis Kneale for his commentary on CNBC last week. He provides the best assessment I have heard thus far about this so-called crisis and where the problem really lies. Listen to what he has to say and please forward this to your fellow REALTORS® and all of your clients today! – Dick Gaylord, 2008 NAR President
I received a call from a journalist asking me what were the worst calls for 2008 — by the media, by the specific pundits, and others. My initial reaction was anything Ben Stein said in print, and anything Don Luskin said on Kudlow & Co. But there are obviously many others, and we are taking…Read More
Economists are now admitting that we are in a recession in the US, according to National Association for Business Economics (NABE). 96% of their survey respondents said the U.S. is in recession today. Hey guys — thanks for the news flash! With the S&P down 47%, telling us that the US is in a recession…Read More