Financial Crisis 2008

AIG (American International Group) was the biggest insurance company.Which is also selling Credit Default Swaps.

Financial Crises 2008

Credit Default Swap:The buyer of a credit default swap receives credit

protection,whereas the seller of the swap guarantees the

credit worthiness of the debt security.

Investors apply in credit default swap and pay premium to AIG to ensure their securities ..

In doing so, the risk of default is transferred from the holder of the income security to the seller of the swap.

Investor company pay premium to AIG for securing the CDO and AIG cover the loss if CDO went bad.

This thing protect the interest of investor and promote investment in the country.

Joseph, the head of AIG, made $315M personally from AIG.

Speculators insure CDOs, they did not own, and bet against it.

WHAT IS A CDO?

One way to imagine a CDO is as a box into which monthly payments are made from multiple mortgages. It is usually divided into tranches, each representing different risk levels.

As borrowers make payments on their mortgages, the box fills with cash. Once a threshold has been reached, such as 60% of the month's commitment, bottom-tranch investors are permitted to withdraw their shares.

Tranch = Level of risks like 2 year mortgage or 5 year ..

This system is just like insuring your own house. But in case of CDOs many people may insure your house.

Auditor of AIG resigned as warning ..

“Financial Development make the world riskier more than ever.”

Paper focus on study that:

“Huge cash bonuses on short term period increase the risk levelandthere is no penalty for the losses which made whole

system riskier.”

Further, study relates to the personality tactics of the Wall Street People.

When Lehman Bros became bankrupt, they had Million $ paintings, 16 Private Jets in the date of bankruptcy.

A research shows that:“The part of Brain stimulate upon the prize of Currency

is the same part of brain which is stimulates on use of COCAINE.

There is an example of a broker..

Ratio of Loan in USA

Borrowers were borrowing 99.3 % of amount of loans in USA ..

If they went bad, they walk away ..

HENRY PAULSON ( Former CEO of Goldman Sacks)

Treasury Secretary of USA in 2008

Henry sold stock of Goldman of $485MandHe save $50M of tax due to the position in congress.

He sold CDOs in 2006 but He bet against those CDOs as well which surely result in down market.

Now, AIG compensate for the CDOs which save the company for recession but Investors lost their whole investment in the play.

How much there is loss, same is the profit to Goldman.

Rating of Goldman decrease from AAA to BBB, then people lost their investment.

When Paulson left no further CDOs to issued, he take help of Goldman and Deutch Bank ..

BOD also face congress committee for this issue ..

MORGAN STANLEY:

Another name in selling toxic CDOs.

Employees of Virgin Island sue against Him of Fraud.

Real issue creates due to the working of Rating agencies like S&P and Moody.

Which does not recognize the real threat to the financial system.

Rating agencies use the term “Opinion” for their expression of statements.

CRISESBernanke:

He become Chairman of Federal Reserve Board in 2006.

He spot the issue on his last meeting in 2008 about having any disturbance. Amazing!

Even FBI warn about danger in 2004,Many analysts issued articles in 2005,2006 and 2007

When loans becoming bad, then foreclosures (Recovery of Debt)were increasing.

This issue was discussed in 2008 G7 conference by French minister but nobody in US ministry listen to it seriously.

An insurance bank does not have money to purchase $2 share of J.P.MORGAN., then Federal reserve help him.

After some days, Lehman Bros. crash and insolvent. Before some days , they were on AA rating. Oh!

Lynch bank was also going to down side which was then acquire by the Bank of America ..

Barclays was the only institution who want to acquire the Lehman Bros. for which Britain ask for guarantee on it. But Govt. of America refuses and Lehman Bros down with His London office as well.

AIG also went down by not giving the compensation to investors,ThenGovernment acquire this institution also.