Posted on 02/17/2010 8:51:11 PM PST by Lancelot Jones
It was introduced to the House on December 14 of 2000 by a Republican. Co-sponsored by three Republicans and one Democrat, it was never debated in the House.
Its companion bill was introduced in Congress the very next day (just hours before Congressional Christmas break) by a Republican. Co-sponsored by three Republicans and two Democrats, it was likewise never debated in the Senate.
It was immediately incorporated by reference into an omnibus budget bill that was passed by a vote count of 290 to 60 in the House. The Senate version passed by “Unanimous Consent.”
It was signed into law by President William Jefferson Clinton on December 21st, 2000, and it provided Joseph Cassano with the opportunity to make more money that he could have ever imagined.
“It” was the Commodity Futures Modernization Act of 2000, the law that deregulated credit default swaps (CDS), making it possible for Cassano, head of AIG’s London-based Financial Products Division (pictured peering from the door of his $11 million home in London) to sell those swaps at an incredible rate, and at great profit to himself and to those around him.
Cassano’s AIGFPD is the acknowledged epicenter of the AIG meltdown which threatens to derail the financial stability of the world.
What is a credit default swap?
It is a contract or insurance policy between a seller (a bank) and a buyer (bondholder). The CDS maintains that the seller agrees to pay the buyer in the event of a bond default or bankruptcy. A CDS is essentially bond insurance.
The idea was presented to Cassano ten years ago, soon after his selection as head of AIGFPD, by derivative specialists from J.P. Morgan: AIG should try writing insurance policies on packaged debts known as collateralized debt obligations (CDO), pooled loans sliced into tranches and sold to investors based on their credit worthiness.
Basically, the proposal meant that the London-based unit was agreeing to provide insurance to financial institutions holding CDO’s and other debts in case they defaulted…much like homeowners are required to purchase mortgage insurance to protect lenders in the eventuality that the borrower cannot pay back the loan.
Because the underlying debt securities were highly rated, AIG Financial Products was more than happy to book income in exchange for providing short-term (according to AIG, four or five years at the longest) insurance policies, Joe Cassano and his colleagues never dreamed that they would actually have to pay any claims. Since AIG was a highly-rated company, it did not have to put up any collateral on the insurance it wrote, making the sale of CDS even more profitable.
These credit default swaps turned AIG’s 377 man office into a veritable cash register…Joe Cassano had discovered a money tree.
Revenues rose from $737 million in 1999, to $3.26 billion in 2005; AIGFPD provided 17.5% of AIG’s operating income for 2005. Along with operating income, personal earnings rose dramatically; Joe Cassano, and the employees of AIGFPD were paid in excess of $3.56 billion in the last seven years, which means that on the average, each person in the unit made more than $1 million per year.
Joe Cassano himself earned $280 million in cash during that period of time– more than AIG chief executives — and for every dollar his financial products unit made, 30 cents came back to Cassano and other top execs.
Meanwhile, back in the United States, things were turning sour on the post 9-11 economic boom. Speculative home buying, spurred by interest rates that hovered around 1%, began to bottom out. In addition, a major push by the Democratic majority in Congress to make buying a home a reality to lower-income families, had Fannie Mae and Freddie Mac lowering down-payment requirements and relaxing lending standards, which added to the already alarming build up of bad mortgage debt. When these new homeowners found themselves incapable of dealing with the increases in their mortgage payments as their interest-only and Adjustable Rate Mortgages, matured, they were forced to walk away from their homes.
The real estate market plummeted. Following close behind it, and possibly as a reaction to the real possibility of Barack Obama (who campaigned on doubling the capital gains tax upon being elected) winning the election, the stock market followed. And AIG’s Financial Products Division suddenly found itself in a position they never expected to be in…they had claims to pay, a lot of claims to pay.
At this point in time, AIG’s Financial Product’s portfolio of credit default swaps stood at $500 billion, and it was generating $250 million a year in income on insurance premiums. AIGFPD was not an insurance company, it was set up as a bank, never required to report to state insurance regulators, and as the worth of the securities they insured declined, they had to put up collateral to their trading partners. Collateral they did not posses.
Any obligations that Cassano’s AIGFPD could not meet had to be paid by its corporate parent, and AIG, the 18th largest public company in the world (according to Forbes Global 2000 list of 2008) was brought to its knees.
Joseph Cassano was fired by AIG in February of 2008 after his unit posted an $11 billion loss, but was allowed to keep $34 million in bonuses, and was kept on as a consultant on a salary of $1 million per month. Since his firing, AIG has posted additional losses of nearly $89 billion, for total posted losses to date of nearly $100 billion. The US government has pumped $173 billion into AIG in an effort to stave off a global financial failure of indescribable proportions.
Unread legislation, slammed through without debate in a show of bipartisan recklessness, signed into law by a lame-duck President in the waning days of his tenure. Thoughtless, politically-driven financial decisions designed to garner votes. Promises of higher corporate taxation from a Socialist Presidential candidate drunk on the wine of populism and hubris. All these factors contributed to this crisis, and led to the loss of untold billions. And Joseph Cassano figured out a way to make all of that pay off in spectacular fashion.
When asked last September if he felt responsible for the AIG crisis, Joe Cassano smiled and said “I left there six months ago.”
Oh no, not me
I never lost control
You’re face to face
With The Man Who Sold The World
There would be NO BAD CREDIT TO SWAP -—
If not for the bad loans that were forced by the government.
It is not the allergin that really kills the person who is allergic to it, it is the REACTION to the allergin.
Fascinating insight. Thanks.
Good ol Hill/Billy! Wonder which off shore bank they have their part deposited in?!?!?
bookmark.
I’m going to have that song in my head all night, thank you.
David Bowie or Nirvana?
“If not for the bad loans that were forced by the government.”
And the fake money manufactured by the government.
You are being distracted.
Not at all.
I am simply writing about one specific aspect of the story in this piece.
I cover other aspects here.
Requiem æternam dona eis, Domine; In memoria æterna erit justus, ab auditione mala non timebit.
Beauseant!
You are 100% completely wrong. The “poor widdle wall Street bankers was forced to make bad loans” fairy tale is utter and complete poppycock. Heck, we can’t hardly even regulate them now, even after they have crashed the system.
Here’s one of a gazillion links:
http://www.traigerlaw.com/news/cra_had_nothing_to_do_with_subprime_crisis_9-29-2008.pdf
Its kinda hard to force a banker to do something when he ain’t subject to the law in the first place.
parsy, who wonders where these GOP urban myths come from
Good article. Don’t entirely agree with all your points but at least you go into some of the more detailed reasons for the mess.
parsy, who salutes you!
PARSY IS FULL OF CRAP!
The government absolutely caused the bad debt, in the first place -—
What happened, when the financial industry tried to deal with that bad debt, is a distraction and a side issue.
If the debt did not exist?
No credit default swap problem would ever have happened!
The facts don’t back you up.
http://www.traigerlaw.com/news/did_they_cause_the_credit_crisis_black_enterprise_january_2009.pdf
parsy, who didn’t fall for this GOP Urban Myth and hopes you don’t either
NONSENSE!
Your intelligence is in doubt, if you really believe that government did NOT cause the financial mess!
The evidence is clearly on my side.
Without the threat of protests, lawsuits, civil penalties, criminal penalties and other “sticks” and without the “Carrot” of Fannie and Freddie promising to purchase the bad paper, from the lenders in question -—
The mortgage crises would never have happened!
You are full of crap.
Nothing you have posted on this topic is true, or makes any sense at all!
Don’t believe me. Believe Darrel Issa, Republican. Here’s link to House report. Go to page 9 or 10. CRA was never more than 3% of loan originations. The problem wasn’t the poor folks. It was the middle upper class folks who told mortgage companies to shove the loans.
Its not that the gov’t didn’t play a big role in the financial mess. It did. Not just thru the CRA.
parsy, who hopes you read the evidence.
Bowie.
Screwed up his life, but I like his voice.
AIG did not create the bad assets. That it made and lost money by insuring them is not surprising or nefarious. Asset bubbles based on bad assets pop.
parsy: The mortgage crises would never have happened!Don’t believe me. Believe Darrel Issa, Republican. Here’s link to House report. Go to page 9 or 10. CRA was never more than 3% of loan originations. The problem wasn’t the poor folks. It was the middle upper class folks who told mortgage companies to shove the loans. Its not that the gov’t didn’t play a big role in the financial mess. It did. Not just thru the CRA.
You're both right - CRA might have been statistically small, but it had the benefit of two things: 1) It set up all sorts of banking infrastructure connections and dependencies of the kind that kansas58 cited, and 2) It had a nice, big fat impact on the perceptions of the middle class once it started to collapse.
All of that provided the cover for the insitigation of the "Commodity Futures Modernization Act of 2000, the law that deregulated credit default swaps (CDS)" that the article talks about. It was a one-two punch. Look - common sense says that the Clintons aren't going to ram through an ineffective ploy in the dead of night. It was a kill shot that had to be set up, and that means background infrastructure plus a messy front end that can be claimed as the "cause."
I definitely agree that the CFMA was a big, if not the biggest contributor to the meltdown. Without the swaps, all you would have had were some bad and underperforming loans. With CFMA, you now had all kinds of bets that could be made on the bad loans. Now you don’t only have the bad loan imopact, you have the bad bets impact. I think I read the notional value of derivatives is like $600 TRILLION. I have seen higher numbers.
This is how AIG happened. AIG covered the bets without sufficient collateral and assets to cover them. The gov’t stepped in because one of the parties AIG had covered bets for was....drumroll.....tada....Goldman Sachs!
Nonetheless, I think the GOP is real happy to spread the “The poor folks did it to us” line of hooey so no one will look at the impact of their de-regulation drives and other financial sins. They can sit back and blame the Dems. Conservatives will either catch on, or this will happen again. My bet is, it will happen again.
Economically, Conservatives have ceased being conservative and have become quasi-Libertarians. Conservatives no longer have the mental framework with which to analyze economic issues, instead relying on faith-based Libertarian dogmatics. At least the conservatives in the GOP.
parsy, who is trying to reverse this atrocity
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