[ExI] AIG Bail out

Kevin Freels kevinfreels at insightbb.com
Sat Sep 20 04:02:53 UTC 2008

----- Original Message -----
From: Lee Corbin <lcorbin at rawbw.com>
Date: Friday, September 19, 2008 1:43
Subject: Re: [ExI] AIG Bail out
To: ExI chat list <extropy-chat at lists.extropy.org>

> Kevin writes
> > I worked in the mortgage industry for a very long time while this
> > was going on. I can tell you first hand that out on the front lines
> > we were simply amazed at some of the programs and rates
> > being offered. Not a day would go by when I would see some
> > company like Countrywide approve and close a loan that
> > should not have been made. I personally watched millions of
> > dollars every month being funded for loans where the borrower
> > had no job, or was self-employed for 6 months and couldn't
> > even prove it, yet had a bankruptcy discharged 3 months ago
> > and had $3000 down payment that everyone knew darn well
> > was coming from the seller of the house in question.
> Yes, Kevin, but why? I'm really asking. From your point of
> view, what caused these managers---who normally are profit-
> oriented profit-hungry capitalists with no heart---take such
> stupid chances?  WHY would they do it?

It wasn't just the managers. It was a complete underestimation of the risk these pools represented. They weren't going to keep and service these loans. They would package them into pools of similar loans and sell them to the next bigger bank who again would do the same all the way up to Lehman and Bear Stearns. Fannie and Freddie were even on the verge of rolling out subprime programs because they were so lucrative. 

But that was a problem. Everyne in this industry knew that it was cyclical. So they wanted to get as many as they could while they could. Every type of loan imaginable was put together and it was always an easy sell. We were getting 112 basis points on 8% 100% self-employed stated with a 580 credit score! In the end, it kept happening because some idiots at the top had a great interest in buying all of this debt. Their company worth was shifted towards assets and not cash. The way the process works - including a foreclosure process that sometimes drags on for a year or more - provided an atmosphere where the default rates were going up while they were continuing to expand these products even further. 

In the end, I would say it is a case of people at the top not understanding fully what they are buying, OR willfully ignoring it. I'm not sure which. Both are probably somewhat true. After all, these execs made hundreds of millions of dollars each and it really doesn't matter to them whether or not the whole thing collapses. They can retire just fine.

In a way, this is similar to the agressive behavior that is in our genes. The agressive ones were more likely to win wars, so agression is rewarded with greater reproduction. But agressive people also take more risks and many end up killing themselves so there is a sort of balance of risky and conservative people.I seem to recall a thread talking about this recently and it's interesting how this fits. I'll have to ponder that some more.

Either way, everyone was there to get the money while they could. They all knew the end would come which made it all that much more important to make even more. To hell with the company and the shareholders. 

One thing I am not sure of is the role that regulation played here. I am left t wnder if less regulation would have allowed the shareholders and the end buyers of the debts at he top be aware of the situation at the bottom much sooner. 18 month foreclosures, short sales, multiple appraisals, RESPA, predatory lending, all work to muddy the waters making it less clear what is going on...an incomplete thought at the moment, but something else to ponder. Sleep is definitely going to be tought tonight! 

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