Posts filed under “Really, really bad calls”
“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 as to how AIG got so buried in the credit default swaps (CDS) business.
“For months, several executives at AIG Financial Products had pulled apart the data, looking for flaws in the logic. In phone calls and e-mails, at meetings and on their trading floor, they kept asking themselves in early 1998: Could this be right? What are we missing?
Their debate centered on a consultant’s computer model and a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company’s corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.
The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations. As AIG’s top executives and Tom Savage, the 48-year-old Financial Products president, understood the model’s projections, the U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events that would require Financial Products to cover defaults.
If that happened, the holders of swaps would almost certainly be wiped out, so how could they even collect? Financial Products would receive millions of dollars in fees for taking on infinitesimal risk.
The firm’s chief operating officer, Joseph Cassano, had studied the model and urged Savage to give the swaps a green light. . . .
Initially, the credit-default swaps business would amount to a fraction of the half-billion dollars in Financial Products’ revenue that year. It didn’t seem to them like a major decision and certainly not a turning point.
They were wrong. The firm’s entry into credit-default swaps would evolve into insuring more volatile forms of debt, including the mortgage-backed securities that helped fuel the real estate boom now gone bust. It would expose AIG to more than $500 billion in liabilities and entangle dozens of financial institutions on Wall Street and around the world.
Who ever could have foreseen that “free money” would backfire?
Call it the revenge of the Black Swan . . .
A Crack in The System (part 2 of 3)
Brady Dennis and Robert O’Harrow Jr.
Washington Post, Tuesday, December 30, 2008; Page A01
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
Mr. Moulle-Berteaux, along with Barton Biggs, is a partner of Traxis Partners, a hedge fund firm based in New York. They have had a series of disasterous calls recently: Shorting Oil three years ago at $50, and a mere 6 months ago, this horrific call in the WSJ, declaring the end of problems in residential…Read More