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To: DuckTapeSunroof who wrote (34114)	3/16/2009 12:26:30 PM
From: DuckTapeSunroof	Respond to of 71588

AIG's Not Very Transparent List of Counterparties 2 comments by: Felix Salmon March 16, 2009 \| about stocks: AIG seekingalpha.com It's good that AIG has released a list of its counterparties. But if it really believes in "the importance of upholding a high degree of transparency with respect to the use of public funds", this is a very odd way of releasing the information. If you're not already familiar with the intricacies of AIG's operations, it's very easy to just start adding up the numbers in the various appendices, coming up with a kind of bailout league table: Goldman got $12.9 billion! Barclays got $8.5 billion! But in fact it's much more complicated than that. There are four appendices in all. Before we get to them, it's worth reading a bit of Gretchen Morgenson today: Even A.I.G.'s own independent directors haven't been told which of the counterparties were paid... Such secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.'s counterparties whole on losses that have not happened yet? What Morgenson is talking about here is the second of the four appendices: the payments made by the company known as "Maiden Lane III". After banks insured their assets against default, AIG essentially used Maiden Lane III to take those assets onto its own books, thereby allowing it to cancel out the insurance contracts. The big winners here are SocGen and Goldman Sachs -- and it's worth noting that unlike the first appendix, where the counterparties are helpfully listed in order of size, in the second appendix there seems to be no particular order at all, and the two biggest recipients of government money are hidden in the middle of the list. The other three appendices are not in the same class: they don't really constitute government giveaways in the same way. The first lists collateral postings which AIG has made but which haven't really been spent: pace Morgenson, if the losses never happen, then AIG gets all that money back. The third appendix is a list of states, which pretty obviously was included to make it seem as though public money was somehow just getting shunted around and returned to taxpayers in some other form. The final appendix is a list of AIG's securities lending counterparties -- this is pretty much meaningless, and these counterparties hadn't bought any type of insurance from AIG at all. Instead they had simply borrowed securities from AIG, posting collateral of their own; when they returned the securities some time later, they got their collateral back. In the interim, AIG had managed to invest that collateral very badly, so it had to make up the losses itself. But those losses were not in any way related to the counterparties who borrowed AIG's securities, and it doesn't really make a lot of sense to think of those counterparties as being bailed out to the tune of $43.7 billion. If AIG had been liquidated, those counterparties would at the very least have kept hold of the securities they'd borrowed, instead of giving them back -- including the securities which had gone up in value rather than down. So the maximum loss to the counterparties would have been much smaller than $43.7 billion. In any event, so many of the counterparties on this list had hedged their AIG exposure that it's massively oversimplifying matters to conclude that even the banks with the biggest exposures on the second appendix are the ones which effectively got the biggest government bailout. It's not nearly as simple as that -- and AIG should be much more upfront about such matters than it is being with this release.

To: DuckTapeSunroof who wrote (34114)	11/13/2009 8:51:47 AM
From: Peter Dierks	1 Recommendation Read Replies (1) \| Respond to of 71588

Acorn and the Housing Bubble The liberal pressure group helped Congress write the affordable housing rules that got us into trouble. NOVEMBER 12, 2009, 7:10 P.M. ET. By EDWARD PINTO All agree that the bursting of the housing bubble caused the financial collapse of 2008. Most agree that the housing bubble started in 1997. Less well understood is that this bubble was the result of government policies that lowered mortgage-lending standards to increase home ownership. One of the key players was the controversial liberal advocacy group, Acorn (Association of Community Organizations for Reform Now). The watershed moment was the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act. To comply with that law's "affordable housing" requirements, Fannie Mae and Freddie Mac would acquire more than $6 trillion of single-family loans over the next 16 years. Congress's goal was to force these two government-sponsored enterprises (GSEs) to purchase loans that had been originated by banks—loans that were made under the pressure of another federal law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and moderate-income communities. From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements." The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse? The previous year, as Allen Fishbein, currently an adviser for consumer policy at the Federal Reserve, has noted, Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates. Interim goals were set at 30% of the single-family mortgages purchased by Fannie and Freddie, and the Department of Housing and Urban Development has increased that percentage over time. The goal of the community groups was to force Fannie and Freddie to loosen their underwriting standards, in order to facilitate the purchase of loans made under the CRA. Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines. The proposals of Acorn and other affordable-housing advocacy groups were acceptable to Fannie. Fannie had been planning to use the carrot of affordable-housing lending to maintain its hold over Congress and stave off its efforts to impose a strong safety and soundness regulator to oversee the company. (It was not until 2008 that a strong regulator was created for Fannie and Freddie. A little over a month later both GSEs were placed into conservatorship; they have requested a combined $112 billion in assistance from the federal government, and much more will be needed over the next few years.) The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures. As a result of congressional and regulatory actions, the percentage of conventional first mortgages (not guaranteed by the Federal Housing Administration or the Veteran's Administration) used to purchase a home with the borrower putting 5% or less down tripled from 9% in 1991 to 27% in 1995, eventually reaching 29% in 2007. Fannie and Freddie acquired $1.2 trillion of loans from banks and other lenders from 1993 to 2007. This amounted to 62% of all such conventional home purchase loans with a down payment of 5% or less that were originated nationwide over the same period. Fannie and Freddie also acquired $2.2 trillion in subprime loans and private securities backed by subprime loans from 1997 to 2007. Acorn and the other advocacy groups succeeded at getting Congress to mandate "innovative and flexible" lending practices such as higher debt ratios and creative definitions of income. And the serious delinquency rate on Fannie and Freddie's $1.5 trillion in high-risk loans was 10.3% as of Sept. 30, 2009. This is about seven times the delinquency rate on the GSEs' traditional loans. Fifty percent of the high-risk loans are estimated to be CRA loans, with much of the remainder useful to the GSEs in meeting their affordable-housing goals. The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006. Now this history may repeat itself as many of the same community groups are pushing Congress to expand CRA to cover all mortgage lenders, credit unions, insurance companies and others financial industry segments. Are we about to set the stage for another catastrophe? Mr. Pinto was the chief credit officer at Fannie Mae from 1987 to 1989. He is currently a consultant to the mortgage-finance industry. online.wsj.com