insights to why AIG fails?

[Aqua Pro Builder]

Why does it fail?
Why so suddenly or so unexpectedly to the general public?
Did you guys feel the shock-I am out of country now-don't wanna come back only to see all my friends got lay off.

 

[Killerdrgn]

AIG failed because it insured all those bad mortgages, and then the collateralized debt agreements that the banks traded those mortgages around with. So when one mortgage failed they got hit up for insurance twice. Actually I should say several times cause they traded and repackaged those mortgages everywhere.

 

[MikeyZO]

My friend found this article.

http://query.nytimes.com/gst/fullpa...933A0575AC0A96F958260&sec=&spon=&pagewanted=1#

Notice the published date of Sept 1999. This is where it all began.

 

[Aqua Pro Builder]

Does bad mortgages means many homes got defaulted? If so, should the market be flooded with low cost houses and a good time to buy houses? Or, should we just keep the cash to warm our bodies?

 

[Domboski]

I believe these firms are in trouble because they got greedy. The bulk of the money they were making was being pulled out of the business and they used "borrowed" money to support operations similar to "revolving debt". There is a lot more detail to to what I'm saying and Killerdrgn's post is one example. They knew what the risks were but no one cared because they were making so much money. Think of the Billions of dollars Lehman brothers has made over the years.....Where did it all go? :scratchch As a start, salaries, executive suites and apartments, luxurious office space and buildings, private jets and helicopters, client "gifts", etc. Just my opinion.

 

[Phyl]

The banks are holding onto the defaulted houses right now. They are waiting/hoping for a "buyout" package from the Feds that will allow them to recoup the defaulted mortgages. But since their buyout amount is contingent upon sum of their current defaults, they need to hold them until the buyout is announced.

Then expect a flood of low cost housing, largely in disrepair, to hit the streets.



.

 

[Domboski]

Does bad mortgages means many homes got defaulted? If so, should the market be flooded with low cost houses and a good time to buy houses? Or, should we just keep the cash to warm our bodies?

It's a great time to buy if you can afford to sit on the property or house until the market recovers. Who knows how long that is going to be though.

 

[tosiek]

the wait plus the fact that it will be real hard to get a mortgage/loan for those low priced houses =0) Even at a discounted price i doubt alot of people can afford the 800+ the houses will be going for close to the city.

 

[Killerdrgn]

It wasn't just the excessive spending either, the way they borrowed money from these mortgages was to collateralize them. Meaning if I failed to pay back my loan you can take this mortgage. Typically the collateral is worth more or just about equal to the loan itself. So when the mortgages started to go into late payments (Not in default yet, will happen soon enough) they needed more collateral to keep their lines of credit open so they could continue to pay for operations. Which by the way is how most businesses keep their companies running between their paychecks nowadays. So when they couldn't come up with the collateral their credit lines started shrinking and then they just stopped being able to pay for anything. So technically they were just temporarily bankrupt, even though there is no real hope that poor people can pay their 25% interest mortgages. So the credit crisis is based on the unknown fact of which companies are holding on to these ticking time bombs, so no banks want to lend out money to people/companies that may be holding on to bad debt. Basically a self fulfilling prophecy.

I believe these firms are in trouble because they got greedy. The bulk of the money they were making was being pulled out of the business and they used "borrowed" money to support operations similar to "revolving debt". There is a lot more detail to to what I'm saying and Killerdrgn's post is one example. They knew what the risks were but no one cared because they were making so much money. Think of the Billions of dollars Lehman brothers has made over the years.....Where did it all go? :scratchch As a start, salaries, executive suites and apartments, luxurious office space and buildings, private jets and helicopters, client "gifts", etc. Just my opinion.

 

[georgelc86]

Greatest country on earth and yet we devise ways to screw our citizens. 2 3 4K apartments. 56 million dollar homes that should be 350K. God bless america.

 

[meschaefer]

I try to make it a point to stay out of these types of discussions, but I thought I could provide some usefull information regarding the rapidity of AIG problems without expressing a personal opinon.

This is a very simplfied explanation of what happened to AIG.

Techinically they did not fail but where close to it happening very quickly.

The reason it was going to happen very qucikly was that their rating was going to be downgraded from AA to A-. This is a rating put out by Moodys and Standard & Poors that rates a companies ability to pay its debt. The immediate impact of such a change was that they where required by various regulations to keep more cash at hand because of it. i.e., because their credit rating dropped they where required to have more money in the bank as collateral. Do to their size, they needed to come up with an extra 70 billion dollars as collateral, wich they did not have and would not be able to raise quickly enough. If they couldn't meet their financial requirements they would have been forced to file for bankruptcy.

 

[Josh]

The reason it was going to happen very qucikly was that their rating was going to be downgraded from AA to A-.

Also, this would cause a HUGE amount of money moving out of their funds, worsening the problem. I still don't understand how these securities were sitting at AAA and AA ratings, which makes them roughly the equivalent of US T bills.

 

[meschaefer]

Also, this would cause a HUGE amount of money moving out of their funds, worsening the problem. I still don't understand how these securities were sitting at AAA and AA ratings, which makes them roughly the equivalent of US T bills.

I am slightly fuzzier on this part, but I beleive that the mortagages where still trading at decent prices during the last ratings review. (We are talking about the value of the debt on the open market) As the price of the mortgages fell, the value of the portfolio fell as well resulting in a reduced raiting. What is interesting is that while the values of the mortgage fell, many (although not all) fell below the value of the collateral (i.e. the equity in the property). Under current accounting rules, the market value of the mortgage is what is recorded on balance sheets making a bleek situation look bleeker, and making what would be a secure debt unmarketable. The unmarketablity of these debts is one (of probably many) reasons for the current credit problems.

 

[Domboski]

Is it safe to say the credit card companies are next in line if it hasn't started already? If this is a silly question I apologize. I've been talking about this topic with my CEO who used to run a few large banks and he speaks in a language I can not understand.

 

[Killerdrgn]

Damn Meschaefer is just repeating what I said. And yeah credit card companies are going to feel the crunch soon enough. Though most major credit cards are backed by huge banks that have decent cash cushions.

 

[meschaefer]

Damn Meschaefer is just repeating what I said.

Sorry, I tend to open a window and start drafting a response while at work. Often I get intrrupted by "work" :irked:, and it takes a while before I post the response. Didn't mean to "repeat" what you had said, I had probably been drafting my response for about hour or so before it was posted and I admittidly don't go back to see what new information has been posted during that time frame.

Matt

 

[cali_reef]

Techinically they did not fail but where close to it happening very quickly.

This is true and most panicked share holder don't understand this part and aggravated the situation by selling their stock.

I think their problem was more related to the rising claims on default insurance they sold.

 

[Killerdrgn]

Sorry, I tend to open a window and start drafting a response while at work. Often I get intrrupted by "work" :irked:, and it takes a while before I post the response. Didn't mean to "repeat" what you had said, I had probably been drafting my response for about hour or so before it was posted and I admittidly don't go back to see what new information has been posted during that time frame.

Matt

No worries mate! It's all good.