What You Missed This Weekend in Financial News

The end of the world, most likely. Financial giant AIG has posted a $60 billion loss.

Daily Financial Crisis Recap 15.10.08

Banks are forced to take a $250 billion bailout package from the govt. It comes with strings attached. I want those high powered executives to stop getting 8 figure yearly bonuses when their banks aren’t performing well. And no eight figure severance packages either. Profits fall at JP Morgan Chase.

The Dow lost 733.08 pts to 8,577.91. It lost 7.87%.

IRS to tighten tax oversight of banks.

AIG’s wild expenditures anger the NY State Attorney General Andrew Cuomo. He’s not the only one. It doesn’t make sense than any one person should receive a $50 million bonus at the end of the year.

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Relevant Posts (check out the finance category for more)

AIG Spending Habits Questioned

Today, AIG execs were questioned by the House for their incredible spending habits, even in tough times like these. These execs are used to wiping their asses with $100 bills, so I’m not surprised about this. One thing that this crisis will hopefully teach these guys, is that they are always accountable. In fact, they are alway accountable to their shareholders. It makes you wonder why these execs still receive multi-million bonuses, even though their companies are making a loss.

AIG Already Used $61 Billion

Credit agencies were startled to learn that AIG had already withdrawn $61 billion from the total $85 billion Fed bridge loan. AIG stocks will plummet once again.

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.


AIG: A Blind Eye To A Web Of Risk

Excellent article over at the NYT about what exactly happened at AIG. AIG was bailed out by a $85 billion Fed loan.

The Fed’s Move Is Seen As A Free Market Detour

The US has always been a global beacon of free market capitalism. But what does the latest bailout of the Fed of the ailing American insurer AIG say to the global financial community? That unfettered capitalism doesn’t work. The most aggressive companies acting on Wall Street act like broncos. When things don’t work out for them, they let the government bail them out. Wall Street won’t learn if the Fed continues with its policies, but what choice did it have? If AIG fails, it would disastrous for the US economy.

AIG is best known for selling conventional products like insurance polices and annuities, products that are overseen by state and federal regulators. The problem is that AIG is also deeply involved in the risky, opaque market for financial derivatives and other complicated financial instruments, which are unregulated.

“It’s pure crisis management,” Mr. Chernow said. “It’s the Treasury and the Federal Reserve lurching from crisis to crisis without a clear statement on how financial failures will be handled in the future. They’re afraid to articulate such a policy. The safety net they are spreading seems to widen every day with no end in sight.”

Fed To Loan A.I.G. 85 Billion

In an incredible move, the Fed reversed its decision from Sunday night and decided to loan the struggling insurer AIG $85 billion. Unless backed by the government, the insurer would have followed Lehman Brother suit into bankruptcy. AIG’s struggle stem from credilt default swaps:

Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss.