Posts Tagged 'credit crisis'

Anonymous Banker on the Upcoming Credit Crisis

Things are just going to get worse… (via df)

House Passed Bailout Bill

Even though the President signed the Bailout bill after the House approved it today by a vote of 263-171, stocks continued to slide. European banks are swooping in getting the business that is left unclaimed by the financial demise of some US banking institutions.

A majority of Republicans, 108-91, voted against the bailout bill.

After the House rejected the plan, the Senate stepped in, and attached a $150.5 billion package of popular provisions, including tax breaks for the production and use of renewable energy and protection for millions of American families from paying the alternative minimum tax, which was initially aimed at the wealthy.

[...]

The final agreement called for the $700 billion to be disbursed in parts: $250 billion at first, to get the program started, followed by $100 billion at the discretion of Mr. Bush and the remaining $350 billion upon request of the Treasury with Congress empowered to block the last installment by acting within 15 days.

*

Wells Fargo is buying all of Wachovia for $15.1 billion. This trumps the deal Wachovia had with Citigroup, which was for $2.2 billion.

Wachovia’s deal with Wells Fargo will further concentrate Americans’ bank deposits in the hands of three banks: Bank of America, JPMorgan Chase and Wells Fargo would control more than 30 percent of the industry’s deposits. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. *

AIG: The Real Problem Behind The Risks

So, this is how it all went down:

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

[...]

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

[...]

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

[...]

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

[...]

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

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