Things I Don't Understand

[scaryblackdeath]

So I actually passed Econ 100 (or 101?) in college, and I like to think I generally understand stocks and supply & demand & stuff, but I really can't claim to understand larger financial stuff. It's just not my strong point. So I turn to you, my collective of smart and/or knowledgeable friends, to explain it to me in terms I can understand

Comments

[painite]

Regarding number 4: If the bonuses are contractually mandated, there may be nothing the government can legally do to stop them being paid (that does bring up the larger question of, how can those employment agreements be written such that nearly destroying the company makes people eligible for a bonus?)

That said, there's a delightful rumor the the government will, instead, simply try to tax those bonus payments at 99%.

That would make me chortle.

[creamer_boy]

I heard on the drive home that legislation may be introduced as early as tomorrow to impose a 90% tax on incentives and bonuses paid by companies who took bailout money.

As to your 1st point, it doesn't really matter. Remember how the UAW was demonized for sticking to their contractual obligations? The sanctity of contracts seemed to not be so sacrosanct when it protects the worker. The government has nullified workers' contracts when convenient, I don't see why the same can't be done to execs.

Also, the New York DA asked that very same questions... basically saying that the contracts are fraud if the company knew it was unable to make good on them when they entered into them. He's talking fraud charges against AIG.

[creamer_boy]

1.) AIG took advantage of the complexity of derivatives and the fact that regulation of them under Bush was non-existent to create exotic financial instruments. Because of the complexity of how they were valued in relation to their underlying, tangible assets, AIG relied on their prestige and rating to sell them off. This started a snowball effect, driving prices up and allowed AIG to show great profitability, which it used to further increase their prestige and rating, and used the capital generated to make other investments. Then the whole thing fell apart. People realized that the whole thing was, in essence, a completely legal scam, which drove down AIG's stock price and value. This caused creditors to AIG (foreign banks) to call in their loans early on the justification that AIG's greatly reduced worth represented an increase in risk. This caused AIG to have to shed its capital, and the snowball continues. Essentially, if I ask to borrow $5,000 from you and show you that I have $1,000 in savings that will be used to keep

[creamer_boy]

2.) Yes and No.

Remember we have no idea where ANY of the bailout money is going, as the previous Administration did not create any enforceable method of tracing the money.

So yes, because it's going to the same place.

No, because that's an assumption based on lack of information.

The Blogs have been saying, though, that AIG's money is going to overseas banks to whom THEY owe money for this debacle. Conspiracy theory about it says that it's in essence bribe money to keep the foreign banks quiet about some sort of outright fraud AIG perpetrated.

[creamer_boy]

3.) In order to cut it off, you'd need someone to either buy the bad part or buy the good part... the existing company can't just walk away from parts without filing a Chapter 11 re-org.

Chase did this with WaMu (at the urging of the FDIC), buying up the bank and other tangible assets, and leaving the entity "Washington Mutual, Inc." left holding all the crap and declaring bankruptcy.

Problem is, AIG's insurance component is too big for ANYONE to buy (in addition to the fact that insurance still has a lot of enforced regulations in place preventing it), and no one wants to touch the bad part.

So the only thing left is Chapter 11, which would cause ripples through the market that no one wants to deal with.

[creamer_boy]

5.) The lending boom we saw was artificial because deregulation made lenders no longer tied to "traditional" lending guidelines of 20% down, 40% debt-to-income, 30-year fixed loans. Just to keep it simple here, there were other factors that led the lenders to lend to people they would not otherwise do so to. The problem right now is that the banks are so under capitalized that they don't even have the money to lend to the people who qualify under the older, more conservative terms. At least, that's what they say.

[creamer_boy]

6.) Few people incite me to want to seriously hunt them down and beat them like Santelli. Cramer's an egotist, but he at least had the balls to get verbally beaten down by Jon Stewart, and he, in his own way, admitted complicity.