GOOD

How AIG Took Your Money and Ruined the Stock Market


The Dow fell below 7,000 this morning, for the first time in more than a decade. This was mostly based on news that insurance giant AIG had posted a $61.7 billion dollar loss this quarter, the largest ever quarterly loss in the history of quarterly losses. We've been inundated with news about the financial crisis, but how did things get so bad, and what does AIG have to do with it?Luckily for us, The New York Times ran a great article this weekend that you may have missed while you were trying to not think about the stock market that really got to the bottom of the credit crisis and AIG's enormous part in it, and why they can't be allowed to go out of business (it's because that would make hundreds of other companies go out of business).Let's start at the beginning: What was AIG doing during the heady days of the early aughts, when money flowed like water? When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: "regulatory arbitrage" and "ratings arbitrage." The word "arbitrage" usually means taking advantage of a price differential between two securities - a bond and stock of the same company, for instance - that are related in some way. When the word is used to describe A.I.G.'s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be "scam."So, by manipulating regulations loopholes, AIG was finding a way to make what it turns out were really unsafe investments seem totally safe. It did this by allowing banks and investors to put the entire risk of the investment on AIG, by using its AAA credit rating and other sundry methods. The problem is that all of AIG's actions were predicated on the idea that housing prices would never go down. Oops. It did most of this through credit-default swaps, a term that has been thrown around, but which I still have a hard time understanding. The Times piece does a nice breakdown:These exotic instruments acted as a form of insurance ... In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. "It was a way to exploit the triple A rating," said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.Even worse, with the money in fees AIG was taking in from making these deals, it was buying its own mortgage-backed securities, instead of holding enough cash to guarantee the deals. So, as the market crashed and AIG was on the hook for the losses, all the company's assets had already declined in value, making it impossible. So, they don't sound so smart, and yet the government is bailing them out; in effect, we are paying them to keep their business going. Why?If the company defaulted, hundreds of billions of dollars' worth of credit-default swaps would "blow up," and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren't so awful. There isn't really much more to add. Your tax dollars at work, folks, thanks to the friendly folks at AIG.
Articles
AFP News Agency / Twitter

A study out of Belgium found that smart people are much less likely to be bigoted. The same study also found that people who are bigoted are more likely to overestimate their own intelligence.

A horrifying story out of Germany is a perfect example of this truth on full display: an anti-Semite was so dumb the was unable to open a door at the temple he tried to attack.

On Wednesday, October 9, congregants gathered at a synagogue in Humboldtstrasse, Germany for a Yom Kippur service, and an anti-Semite armed with explosives and carrying a rifle attempted to barge in through the door.

Keep Reading Show less
Communities
via Andi-Graf / Pixabay

The old saying goes something like, "Possessions don't make you happy." A more dire version is, "What you own, ends up owning you."

Are these old adages true or just the empty words of ancient party-poopers challenging you not to buy an iPhone 11? According to a new study of 968 young adults by the University of Arizona, being materialistic only brings us misery.

The study examined how engaging in pro-environmental behaviors affects the well-being of millenials. The study found two ways in which they modify their behaviors to help the environment: they either reduce what they consume or purchase green items.

Keep Reading Show less
Culture

One of the biggest obstacles to getting assault weapons banned in the United States is the amount of money they generate.

There were around 10 million guns manufactured in the U.S. in 2016 of which around 2 million were semiautomatic, assault-style weapons. According to the National Shooting Sports Foundation, the firearms industry's trade association, the U.S. industry's total economic impact in 2016 alone was $51 billion.

In 2016, the NRA gave over $50 million to buy support from lawmakers. When one considers the tens of millions of dollars spent on commerce and corruption, it's no wonder gun control advocates have an uphill battle.

That, of course, assumes that money can control just about anyone in the equation. However, there are a few brave souls who actually value human life over profit.

Keep Reading Show less
Health
via Reddit and NASA / Wikimedia Commons

Trees give us a unique glimpse into our past. An examination of tree rings can show us what the climate was like in a given year. Was it a wet winter? Were there hurricanes in the summer? Did a forest fire ravage the area?

An ancient tree in New Zealand is the first to provide evidence of the near reversal of the Earth's magnetic field over 41,000 years ago.

Over the past 83 million years there have been 183 magnetic pole reversals, a process that takes about 7,000 years to complete.

Keep Reading Show less
The Planet
via Pixabay

The final episode of "The Sopranos" made a lot of people angry because it ends with mob boss Tony Soprano and his family eating at an ice cream parlor while "Don't Stop Believin'" by Journey plays in the background … and then, suddenly, the screen turns black.

Some thought the ending was a dirty trick, while others saw it as a stroke of brilliance. A popular theory is that Tony gets shot, but doesn't know it because, as his brother-in-law Bobby Baccala said, "You probably don't even hear it when it happens, right?"

So the show gives us all an idea of what it's like to die. We're here and then we're not.

Keep Reading Show less
Health