Holy Profitable Bailouts, Batman!

[xthread]

Wonders will officially never cease.
As of early this morning, AIG (remember them? the people who thought it was a good idea to insure every mortgage-backed security in the country, and promised to make good to the MBS investors if the homeowners didn't pay their mortgages? used to be the largest insurer on the planet) has prepared a plan for paying back the Federal Bank of New York and the US Treasury. We had expected that AIG was going to be one of the two remaining sources of losses in the 2008 federal bailout of the US financial system.

We were wrong. Now both Chrysler and AIG are expecting to return profits to the federal treasury, instead of losses. The dickering now going on between the Fed, the Treasury, and AIG, is about how much money the US Gov't will make on having prevented the world bond market from collapsing. Pretty neat.

Although it does present a problem for Tea Party governance - if we're actually making money on the financial system bailout, stopping that spending won't improve the state of the federal treasury. (As a side note, we've also come out ahead on the Chrysler deal, which is actually more surprising than AIG making money - a bunch of economists were reporting at the time of the AIG bailout that the Feds should make money on it, but should and three bucks will get you a cup of coffee at Starbucks. No one was nearly that optimistic about Chrysler)

Comments

[xthread.livejournal.com]

Well, and also how you define 'a lot' - if a large but not market-moving number of people were the victims of fraud, or something that looks a lot like it, then we have very different options than if a market-moving number of people were victims of fraud, and so on.

[feyandstrange.livejournal.com]

I would guess that in the subprime markets at least it was a market-moving number; Fannie seems to think so.

(from WIkipedia's Fannie Mae page, more conveinent than digging through us.gov:)

As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.

"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors. "

We don't have solid numbers on predatory lending, partly because "predatory lending" is a poorly defined term, and partly because it's very difficult to prove that I deluded poor old senile Grandma Susan into signing for an outrageous subprime ARM even though she was eligible for prime. But IMO, the fact that the subprime market was predominantly nonwhite, first-timer, low-education-level signers is indicative that the likelihood is strong that those signers had no idea what they'd gotten into. Add in the incentives that lenders were offering their salesforces (bonuses for selling subprime loans etc) and it looks very ugly to me.