The Treasury is tackling foreclosures
The Treasury is tackling the foreclosure crisis by pumping into AIG another $27 billion. This will increase to $150 billion the taxpayers’ investment. This has been described as an attempt by Secretary Paulson to help his friends on Wall Street rather than protect the interest of the taxpayers.
Industrial and commercial businesses, together with life insurance, give AIG a solid basis. Despite this, AIG was attracted to easy profits like many other financial firms through the foreclosure route of collaterized debt obligations (CDOs). When the homeowner foreclosed, AIG was paid fees in order to guarantee repayment of the mortages. AIG felt that there was little risk with the CDOs, which were mortgage-backed bonds, on the assumption that home prices would continue to rise faster than household incomes.
In case of an abnormal number of foreclosures and defaulting mortgages, AIG would deposit cash or any other liquid assets with those who had invested in CDOs. In the summer of 2007, AIG was unable to raise enough cash and failed to meet its obligations entirely. AIG was given $85 billion in loans by the Federal Reserve on September 16 in exchange for the right to buy common stocks, or warrants, worth 79.9 percent of the company. AIG was expected to use this loan to honour the obligations to the CDO holders. The company was to repay the Federal Reserve loan by selling part of its insurance business. Another loan was given by Federal Reserve on October 9 amounting to $38 billion.
AIG found the loan inadequate to tackle its part in the foreclosure crisis. It has not been able to sell enough of its insurance business to repay the Federal Reserve loan. The original loan will now be restructured by the Treasury and Federal Reserve. Two special funds will be set up. One will be used to buy the CDOs whose value has declined upto 50 cents on a dollar. The second fund is expected to solve AIG’s liquidity problems in its securities lending business.
These measures have been criticized on grounds of not getting enough benefits for tax payers. The government is being seen to assume greater risks; but these risks are not translating into benefits for the taxpayer. If the deal is successful, then AIG stands to benefit; if it fails, then government is burdened with obligations.
Even after the first bailout given to AIG, the executives of the company have not scrimped on their ‘official’ expenses – luxurious hunting trips abroad and high profile golf retreats.
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