Originally posted by KellyJayBend over and that that capitalism like a bitch.
Much is being made of the AIG bonuses it seems that the Congress is
upset, that AIG in order to keep employees in that troubled company
have 200 million or there about legally and by contract have bonus to
give to those employees. That does not trouble me in the least,
people contractually were to get those bonuses so they should,
Congress could have b ...[text shortened]... ore they cry over
AIG, the more they need to be looked at, what else has Congress
done?
Kelly
what a shame none of you have even the slightest clue.
None of you have any idea how the derivatives market works.
why don't you leave subjects about which you simply know nothing useful alone?
Or, try reading something, engaging the brain, before opening the trap.
see Melting into Air, by John Lanchester in the Nov 10, 2008 New Yorker.
Might learn something that could then fuel something useful, or at least something even close to what is actually happening.
How do I know? Because my spouse reports to the director of one of the key banking regulatory agencies, writes congressional testimony and speeches on all of this. I help edit -- if I can understand it, then it can go out.
Is it complex? you've no idea.
so either get some real knowledge or stop wasting bandwidth already
what is happening? how did we get here? in hindsight, we see the consequences of over reliance on financial models, of rating agency influence on structured products, of the lack of due diligence in packaging of structured products, the weaknesses in originate-to-distribute models, and the lack of controls over third party (brokers, conduits, wholesalers) loan originators.
The AIG crisis was caused, in part, by the application of the mark-to-market” accounting rules, which require one to report the fair value of the positions one holds on one's balance sheets and the periodic changes in their fair value on the income statement.
Most important to financial institutions is a change in recognizing “other-than-temporary impairment” (OTTI) of investment securities. Banking agencies support amending the current accounting rules on “other-than-temporary impairments” so that only credit losses are reflected in earnings, but the non-credit loss piece would not reduce earnings or regulatory capital.
For loans held for sale and foreclosed real estate, when the fair value declines below cost, the loss is charged to earnings and regulatory capital. Accountants refer to this as “LOCOM,” or “lower-of-cost-or-market” accounting. As the bank intends to sell these assets, this treatment makes sense. So, this is LOCOM. What about “mark-to-market” accounting?
Banks must use “mark-to-market” accounting for the following assets: trading securities and derivatives, as well as any eligible assets for which the bank has voluntarily elected to report at fair value. All changes in the fair value of such assets, whether deemed temporary or otherwise, are reflected in earnings and regulatory capital. As these assets are managed on a fair value basis, this treatment also makes sense.
For investment securities (that is, those classified as “available-for-sale” and “held-to-maturity&rdquo😉, temporary changes in the fair value are not reflected in earnings or regulatory capital. However, for investment securities where the decline in fair value is deemed to be” other-than-temporary,” the changes in fair value are reflected in earnings and regulatory capital.
The accountants say that “other-than-temporary (OTTI)” does not mean permanent. However, the treatment afforded an “other-than-temporary” impairment suggests that it is permanent, in that the entire unrealized loss is charged to earnings, which reduces regulatory capital. I use the term unrealized here to emphasize that the loss is not the result of any sale transaction.
Assessing OTTI is a complex, significant judgment call. The measurement of fair value in illiquid markets poses additional challenges. In the present, unfortunate economic environment, OTTI accounting can result in the recognition of losses that far exceed credit losses.
I’ll use an example to illustrate. Let’s say we have mortgage-backed securities with a cost of $100. Assume the credit quality of the underlying mortgages deteriorates, and therefore the fair value of the securities now is below cost. This decline will be deemed “other-than-temporary” – or OTTI.
Based on extensive analyses and cash flow projections, we estimate credit losses over the life of these securities will be $10. This might suggest a value of approximately $90. However, the fair value of these securities, based on market participant assumptions, is estimated at only 50 cents on the dollar. Even though we do not plan to sell these securities, we must charge to earnings, and reduce regulatory capital, by the entire $50 – not just the $10.
In a more certain economic environment, with an active, liquid market, perhaps the fair value of the securities in this example would be closer to $90, and therefore the impairment would approximate $10 – the estimated credit losses. Unfortunately, in the present, uncertain economic environment with its illiquid market, the impairment includes a non-credit component of approximately $40, which includes a liquidity discount.
When the economic environment improves and the market recovers, we would expect the fair value to approximate $90, as it aligns more closely with the estimated credit losses. So, does it make sense to include the $40 in the OTTI charge to earnings and regulatory capital? In this example, the $40 is clearly a temporary component of the impairment.
The answer is: No, it does not make sense to automatically reflect the entire $50 impairment as a charge to earnings and regulatory capital. Instead, why not account separately for the $40 non-credit component– which is temporary - in a manner that does not reduce earnings and regulatory capital by this amount? Only the estimated credit losses of $10 – the permanent component – should immediately reduce earnings and regulatory capital. Such accounting would be similar to that for loans with identified credit losses.
Congress, some of the banking agencies and others understand that the current accounting rules have forced banks to take steep write-downs since the secondary market for mortgage-backed assets dried up last year. They understand that application of mark-to-market accounting has gutted their balance sheets even though the assets could eventually recover their value. Therefore, there is some consensus to amend the mark-to-market rule.
This is what brought AIG down -- but it should not have been allowed to happen. Congress bears a lot of the blame, and there is enough of that to go around. Credit Default Swaps based on subprime, securitized mortgage debt should never have been left an unregulated product. Financial institutions "too big to fail because of the systemic risk to the world's credit markets should never have been allowed to leverage themselves to the extent of more than 30-to-one given the mark-to-market accounting rule.
You know what's ironic? Not one dime of actual, realized credit loss has resulted from AIG's positions in credit default swaps.
Originally posted by Scriabinhaven't read that one. I did enjoy, "The ascent of Money" though.
what a shame none of you have even the slightest clue.
None of you have any idea how the derivatives market works.
why don't you leave subjects about which you simply know nothing useful alone?
Or, try reading something, engaging the brain, before opening the trap.
see Melting into Air, by John Lanchester in the Nov 10, 2008 New Yorker.
Might ...[text shortened]... omplex? you've no idea.
so either get some real knowledge or stop wasting bandwidth already
Originally posted by ScriabinI'd be interested to hear your take on AIG transferring bail out money to foreign banks. $50 billion is the number I keep reading.
what is happening? how did we get here? in hindsight, we see the consequences of over reliance on financial models, of rating agency influence on structured products, of the lack of due diligence in packaging of structured products, the weaknesses in originate-to-distribute models, and the lack of controls over third party (brokers, conduits, wholesalers) l ...[text shortened]... of actual, realized credit loss has resulted from AIG's positions in credit default swaps.
No choice -- AIG sold foreign counterparties a form of insurance and under the terms of that insurance, has to pay those counterparties. The fact that the money is coming from us, the taxpayers, is all the more reason to look at the foolish Republican economic doctrine of deregulation or voluntary self regulation or no regulation. The fact that this business AIG was engaged in resulted in billions of taxpayer dollars going overseas to make good on AIG's guarantees is not a matter of choice - it is necessary to keep this country's economy from collapsing altogether, relinquishing any hope of regaining the worldwide lead in economic power and policy direction.
AIG’s problems were concentrated around their guarantees of a portfolio of complex, unregulated derivatives, or debt instruments called Credit Default Swaps.
These CDS worked like insurance, providing cash to those who bought the instruments (counterparties) if the market value of the underlying mortgage-backed securities fell.
AIG disclosed its third quarter 2007 financial results, which indicated for the first time a material problem in the Multi Sector CDS portfolio evidenced by a $352 million valuation charge to earnings and the disclosure that collateral was being posted with various counterparties to address further market value erosion in the CDS portfolio.
Some of those counterparties are legally entitled to cash from AIG to cover the market value decline in the value of the securities guaranteed by the CDS instruments.
Hence, AIG contracted to pay cash (which EU versions of the CDS instruments did not do) if the apparent or market value of the underlying mortgage-backed securities declined. This cash had to be paid to foreign counterparties even though there were no actual, realized credit losses.
AIG’s CDS portfolio contained toxic products that posed significant financial strain to the holding company. CDS are financial products that are not regulated by any authority and impose serious challenges on the ability to supervise this risk in unregulated business segments. Adding to these constraints is the absence of any prudential derivatives regulator or standard market regulation.
The complexity of CDS contracts masked risks and weaknesses in the program that led to one type of CDS to perform extremely poorly and another type to perform nearly as expected. Losses from AIG’s domestic multi-sector CDS portfolio were 150 times greater than the European Regulatory Capital CDS book, which was four times larger than the domestic CDS portfolio.
The most significant difference between the US and EU CDS portfolios lies in the numerous, varying contractual triggers, settlement alternatives, and valuation mechanisms. The large majority of the CDS written on domestic multi-sector CDOs required physical settlement in which AIG was required to pay the total unpaid principal and accrued interest upon the occurrence of a credit event, such as underlying securities downgrades and over-collateralization provisions. Valuations were based on the declining market value of the protected securities, which in turn were impacted by market illiquidity. This required AIGFP to post nearly $31 billion in collateral with its CDS counterparties in mid 2008. In contrast, the large majority of the European Regulatory Capital CDS contracts provide for cash settlement when credit losses are realized. The valuation of these CDS was not impacted by market illiquidity. The estimated market losses for the comparable period were $200 million.
Additionally, the current regulatory means of measuring off-balance sheet risks do not fully capture the inherent risks of CDS. In the case of AIG, there was heavy reliance on rating agencies and in-house models to assess the risks associated with these extremely complicated and unregulated products. Models tend to be static and do not always accurately capture the dynamics of the real world. In retrospect, failure to consider valuation and liquidity exposure was a major shortcoming of the modeling process causing a shortfall in the capital allocation and adequacy analysis.
How to fix things? Plug regulatory gaps, institute regulatory reform, but, above all, ENFORCE the rules!!!
I agree with today's NYT editorial, which says:
"It has become a truism of the financial crisis that the system was prone to collapse because there was no single regulator who had the legal tools and authority to prevent a systemwide meltdown. That belief has led to calls from some lawmakers and major banks, among others, for a new “systemic risk regulator” — one regulator to monitor the entire financial landscape for problems that could lead to cascading failures.
"In recent days, the unfolding fiasco of the American International Group and its federal bailout seems to have reinforced the drive for a systemic-risk cop — and the notion that putting one in place is the key to solving all our problems. Speaking of the insurance company’s mess on Wednesday, President Obama said that he had consulted with his economic advisers and with Representative Barney Frank, the chairman of the House Financial Services Committee, about developing tools to “prevent ourselves from getting in a situation where an A.I.G.” can threaten the entire financial system.
"There’s just one problem with all that. The premise is false. The financial crisis, including what went wrong at A.I.G., is not just the result of a missing regulator, a gaping structural gap in the regulatory framework.
"Rather, it is rooted in the refusal of regulators, lawmakers and executive-branch officials to heed warnings about risks in the system and to use their powers to head them off. It is the result of antiregulatory bias and deregulatory zeal — ascendant over the last three decades, but especially prevalent in the last 10 years — that eclipsed not only rules and regulations, but the very will to regulate.
"A.I.G. is a prime example. The company kneecapped itself — and the financial system — via credit default swaps, an unregulated derivative that supposedly reduced investment risk but, as it turned out, increased risk beyond the system’s ability to absorb it.
"In the late 1990s, a drive to fully regulate swaps was squashed by Congress, with the support of then-President Bill Clinton’s Treasury Department. Instead of regulation, which could have prevented the A.I.G. fiasco, a law was passed in 2000 that deregulated swaps. By then, the Treasury secretary was Lawrence Summers, who is now Mr. Obama’s chief economic adviser.
"There are many other examples where rules were blocked, eliminated or ignored. They all make painfully clear that what is needed is a comprehensive response — to restore rules, develop new ones as needed and enforce them day to day; to reassert the government’s regulatory mission; and to reaffirm the centrality of solvency, safety and soundness of financial firms, and of investor and consumer protection.
"A new systemic-risk regulator could play a role in that, coordinating the efforts and identifying emerging risks. A systemic-risk regulator could also assume the important function, currently lacking, of a sort of F.D.I.C. for nonbank financial firms, with authority to seize and restructure critically impaired firms before they threaten the broader system. Mr. Obama specifically cited this function in his remarks on Wednesday.
"Unfortunately, the systemic-risk regulator is more often presented, at least at this early stage of the regulatory reform effort, as an overarching and primary fix for the broken financial system. It is not. Congress must not substitute the quick fix for the hard work of regulatory reform. To do so would squander current public support for re-regulation and would ultimately leave the system vulnerable to a repeat of the same calamities that afflict it today."
Originally posted by Scriabin
How to fix things? Plug regulatory gaps, institute regulatory reform, but, above all, ENFORCE the rules!!!
Bingo. This part from the article is right on...
"There’s just one problem with all that. The premise is false. The financial crisis, including what went wrong at A.I.G., is not just the result of a missing regulator, a gaping structural gap in the regulatory framework.
"Rather, it is rooted in the refusal of regulators, lawmakers and executive-branch officials to heed warnings about risks in the system and to use their powers to head them off. It is the result of antiregulatory bias and deregulatory zeal — ascendant over the last three decades, but especially prevalent in the last 10 years — that eclipsed not only rules and regulations, but the very will to regulate.
Originally posted by KellyJay... That, my friends, was a classic example in world economic history of how not to do it.
Much is being made of the AIG bonuses it seems that the Congress is
upset, that AIG in order to keep employees in that troubled company
have 200 million or there about legally and by contract have bonus to
give to those employees. That does not trouble me in the least,
people contractually were to get those bonuses so they should,
Congress could have b ...[text shortened]... ore they cry over
AIG, the more they need to be looked at, what else has Congress
done?
Kelly
This is the PSL ... have a good night.
Originally posted by ScriabinWhat happened?
what is happening? how did we get here?
What happened is that we've been force-fed a system which relies on greed and gambling and then people whine when they get arse banged by it.
No sympathy here, what-so-ever.
And I do think AIG and the lot of them should take as many bonusses as they want. Let the pigs eat.
And I want you all to sit back and enjoy the show. Take it like a man.