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03/16/2009

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One thing that concerns me about all this is human nature.

When someone gets a health scare, there's a period during which they're more careful and more resolute to improve things, but once they recover, they tend to go back to what they were doing, behavior which probably led to the health scare in the first place.

My concern is that if we recover from this depression - yes, "if", I'm rather pessimistic at the moment, but not quite to the stockpiling ammunition phase yet - we'll go back to business as usual and resume building up the house of cards again.

I accept the need to take tactical measures to correct our situation, but I don't see any strategy (yet) for how we're going to avoid this in the future.

I want to see us move to an economy of sustainability, of production of things of real value, an economy where growth is carefully managed, especially where the inputs are limited (like land or natural resources).

AIG and companies like it are among the alchemists who help turn BBB-rated mortgage-backed securities into AAA-rated collateralized debt obligations


Oh I understand it now........AIG practices financial alchemy....or in other words, fraud.

Yes, Yes how silly of us to be upset!

Here you poor souls have another 100 billion.

I wonder if you will feel quite so charitable after AIG has sapped the taxpayer for the estimated Trillion plus that it is assumed to "really" need to stay short/medium term viable?

Richard,
Have you asked to serve on one of your community's boards or commissions yet? Think global- act local.
Though my friends would say I think global and act loco.

Tom,
I think this would more accurately be called a partial defense of the AIG bailout. For years AIG accrued profits. Billions and billions of dollars were doled out to its shareholders and used to buy pretty trinkets like Manchester United; money that should have been used to cover their bets. Insurance is supposed to pay out even when the event is outside the bounds of actuarial probabilities.

Why will mortgage securities "recover in the marketplace"? The existing ones I mean. Will the subprime borrowers decide to start paying? Will the price of houses go back up 25% anytime soon? What about the increasing commercial real estate default? What about credit card default.

I honestly don't understand that part of your post. Aren't we the American taxpayers going to be into AIG (actually its insureds) for trillions?

At this point, there's no good way to value the securities. In many cases, no one really knows what's in them, so there's no way to quantify the risk and no way to accurately value the securities, so there's no market for them. That artificially -- and presumably temporarily -- depresses their prices. Eventually, analysts will figure out what's in these things and some kind of real value will emerge.

The economy itself is also putting downward pressure on the whole machine. People continue to default on their mortgage, and those houses don't sell quickly at even depressed prices, which gums up the cash flows and depresses values. Presumably, when home sales pick up, the simply fact of liquidity in the marketplace will increase the value of the securities. (people are more willing to buy things they know they can sell, increasing demand.)

Finally, think in broad terms about the scale of the defaults. Let's say 10% of mortgages go into default, which is probably high. Lets' suppose that the houses in default lose 50% of their value. That means that, in simplest possible terms, only 5% of the sum value of mortgages has been lost.

Mortgage-backed securities are trading at, say, 60% of their face value not because that's what they're going to be worth, but because of uncertainty over what they're goin to be worth. That uncertainty will pass, leaving significant upside over the life of those securities.

AIG needs to fall if we're ever going to learn our lesson, then. Patching it up, keeping the illusion of security it provides alive, will simply result in an even more devastating fall in the future.

Boy, choosing to be an English Lit. major is looking less and less like a bankable decision in the coming world...

Adam,
Consumer confidence in English Literature is near record high levels. Consider if you had majored in finance. You would be viewed in the same light as Hitler and Idi Amin.

Wally, thanks for the suggestion. You're right: make a difference where you can.

Best summary of A.I.G. I've seen: Cartoon

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