The Naked Truth
columnist: EJ Moosa

Topic: Government Regulation
AIG-A Scape Goat of Massive Proportions

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There's something a little foul smelling surrounding AIG. I think you probably smell it as well. Yet we keep getting all of these diversionary issues, such as bonus payouts to executives the company needed to keep? Is this an attempt to fan the fumes away so that we do not look to closely. Is there something else going on here?

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by EJ Moosa
(libertarian)
Thursday, March 19, 2009

There's something a little foul smelling surrounding AIG. I think you probably smell it as well. Yet we keep getting all of these diversionary issues, such as bonus payouts to executives the company needed to keep? Is this an attempt to fan the fumes away so that we do not look to closely. Is there something else going on here?

AIG is paying out billions of dollars around the world to cover losses on some complicated financial products. Many of these products involve loans that were purchased by two government sponsored entities from banks throughout the United States.  These governement sponsored entities are  Freddie Mac and Fannie Mae.

AIG sold credit protection with an instrument called credit default swaps(CDS) on collateralized debt obligations (CDO). When financial institutions around the globe were forced to write down the value of these investments, AIG had claims in the billions that they had insured.  The drain against their assets spiralled out of control and their credit rating dropped, forcing their assets even further down in value. This means liquidating those assets to meet those obligation, even though this act accelerated the drive down in asset value. Search for the Mark-to Market rule on how this added fuel to the fire.

Would AIG have sold this credit protection had they known how corrupt the loans that made up these assets had become?  Had all of these bad loans not been made, would AIG be in the mess that it is in today? Where is the accountability on where the root of this problem started? 

Freddie Mac and Fannie Mae created many of the now infamous products that have lead us to where we are today. Loans that financed 100% of the principle, and loans that did not require any evidence that the borrower had the income to repay the principle of the loans. They bought these loans from banks and other financial institutions with nary a glance as to their legitimacy. These products encouraged fraudulent behavior. The banks did not care.  These loans would be sold almost immediately upon closing of the loan. 

Consequently, we can no longer tell the good loans from the bad loans, and all mortgages in these categories are look at with suspicion and have been devalued to the nth degree.

We were not satisfied (we being the politicians) with the traditional model of banking. In the eyes of the politicians, we were not making enough loans to people that they felt should be able to live the American Dream, even if they could not afford it. And, according to their logic, if housing prices keep rising, a 100% loan to value of the property would drop to 80% in just 12 months with a 20% rise in home values. How can it go wrong? And for a while, it seemed to work.

In fact, we had effectively installed ATMs in every home.  As fast as home values were rising, homeowners could make a loan against that rising value, get the cash, and keep on spending.  What could possibly go wrong?

The flaw is that no market rises forever.  Yet this one had to keep rising to keep it afloat.  Consider it a Ponzi scheme of grand design.  It works and works until you run out of participants.

We are distracted by screams of outrage by politicians like Christopher Dodd and Barney Frank. Christopher Dodd is Chairman of the Senate Banking Committee. Barney Frank is the head of the House Financial Services Committee. Do you see who is doing the screaming here? The very people who have been in  charge , developing and promoting the very same programs that have led us to this major failure.

The influence of Dodd and Frank are undeniable.  Their fingerprints are all over the evidence.  These high ranking Democratis have  driving the direction of Freddie, Fannie, and the banking industries  for years and years.   Are these screams meant to distract us from the real truth?

We are being told that we have to get these toxic assets off the books, so that banks can once again go back to business as usual. We are being told it is more important to fix the problem rather than point blame at anyone.

But when it is time to blame, we point at executives at AIG, who agreed to stay on at the company for retention bonuses. To force them to work without the pay they were promised amounts to modern day slavery. You may not have any empathy for people who earn such bonuses, but had they already left the company, AIG would have an even bigger mess on their hands. And now we are passing special individual tax rates to get those bonuses. ( I have to wonder why we cannot just go ahead and pass a tax on Bill Gates and Warren Buffet and others outright---wouldn't we be able to speed things up with 90% of THEIR assets?)

Why is AIG paying all of this money on claims based on fraudulent information used to secure these loans? Is it because they would have to sue Freedie Mac and Fannie Mae (Your Federal Government)? Is it because those in the Federal Government that wanted to grow these entities to such massive proportions are still serving in the Senate and Congress?  Is it because they steadfastly refused to listen to any warnings on this issue?

Is it because if they did, the fingers would point back to the real cause of this crisis? Would the Senate Banking Committee and the House Financial Services Committee come out smelling as sweet if we were able to focus on what they were pushing your local banks to do if we could get to the truth. Would the fingers be pointing back towards those that are screaming the loudest? Would we identify that foul smell we are all beginning to notice?

Would the government-controlled move into the business sectors (such as banking) suffer a major setback if the blame was truly placed where it belonged?

I do not understand why AIG would cover the losses for covering fraudulent investments. Do you? 

If I applied for home owner's insurance, and it was later determined that I had fraudulently represented the value of the home, and then had a loss, should I be able to expect that that I would be paid off anyway? Or would I expect that not only would I not get the full pay off, but that I would forfeit any payoff? Well, that would sure keep me honest.

I have to believe that a CEO basically appointed by the government to run AIG for $1 per year must seriously owe someone in the government one huge favor. To take the verbal abuse from Congress, to endure death threats and politically generated outrage for only $1 a year hints at something else going on here.

AIG is covering up something bigger than we know. The U.S. Government has been sending billions and billions to AIG not because they are good guys. Had AIG started to say no to these claims based on fraudulent loans, there would be no way that we would have gotten bills passed in Congress to attempt to rewrite loans and change principal amounts and mortgage rates. Even if many of the individuals who applied for the loans had no fraudulent intentions, the banks and mortgage lenders were acting on behalf of someone else-your Federal Government.

It was the Federal Government, and specifically those pushing the expansion of Fannie Mae and Freddie Mac. That points back to Dodd and Frank in a very quick manner.

I implore you to look at those that are screaming the loudest, for it is my belief that they have the most to lose if the truth is discovered. To paraphrase Barney Frank, to leave those who made these mistakes in charge to fix the mistakes is an error. Yet that is what we seem to be doing.

If you listen carefully to Timothy Geithner (Treasurer of the United States and Head Tax Cheat), you will hear that the same model that was used to push housing to bubble levels, is going to be used to get loans flowing to businesses. As soon as businesses make loans, the Federal Government is to buy those same loans from the banks, so that the banks can take that money and loan it out again. Does this sound familiar? Are we going to get credit going at any cost?

Or are we going to look a little closer? Do we really want to make the same mistakes again? Can we afford to?

Dodd and Frank hope if they scream long enough we will become fatigued on this topic, and their roles will be forgotten.  We cannot afford to let that happen.  I do not get to vote against Dodd or Frank.  Making sure that people know that they are a major part of the problem seems to be the most I can do.

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©2009 EJ Moosa, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, March 19, 2009
Last modified: Thursday, March 19, 2009

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