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> "If in the end it was the home owners who shouldn't have bought homes that caused the collapse" The problem with placing the blame on the homeowners is that
by kaib 16y ago
> "If in the end it was the home owners who shouldn't have bought homes that caused the collapse"
The problem with placing the blame on the homeowners is that the state stepped in and saved some of the parties in question from counterparty risk. Yes, you should not take out a mortgage that's too big. But if you default the bank should also take a loss for doing such a bad job in giving you a loan.
AIG provided hedges against these bad loans. That, obviously, was a bad business move and they went belly up. But the intermediate banks never felt this counterparty risk because AIG was bailed out by the state.
The moral hazard is that the banks made bad loans and when the homeowners defaulted made large amounts on the hedges (sometimes more than the original capital of the loan). That would never have been possible without the taxpayer bailout, hence the anger.
It's was a fantastic PR move by several banks to publicly parade when they had paid off the bailout loans. The truth seems to be that it was peanuts compared to the money that flowed out from AIG through the hedges made.
- Tichy 16y ago"That would never have been possible without the taxpayer bailout, hence the anger." What I still don't get: wouldn't it make more sense to direct the anger at the bailout, that is, the government? The same guys who are now calling for regulations? Why trust them now? With respect to blaming homeowners, I was referring to the article which blamed lenders to homeowners.
- lolcraft 16y agoWasn't losing the savings of half a country the consequence of not doing that? See Great Depression, Argentina's corralito, etc.
- hga 16y agoA good point which just happens to be one of the points of the Tea Party movement. Anger at those who borrowed more than they should have is inchoate and can stay that way since it brings its own punishments, anger at those making the bailouts is focused and effective. E.g. voting for the TARP was one of many reasons Utah Senator Bennett lost his bid for nomination.
- hga 16y agoThe AIG story is not in the least clear, due to: The inexplicably generous benefits to the counterparties. The more than rumors that AIG's insurance units' investments were of low grade (i.e. a lot of this toxic waste). The fact that the government (NY's, i.e. Elliot Spizer) trashed AIG's corporate governance a few years before the denouncement and basically made their leaders' job pleasing it vs. doing the right thing. This one example of AIG is not one I'm comfortable as of yet using for an object lesson. As for the pay offs/backs, it was a matter of public knowledge/record that some of the firms that were made to take bailout loans ("you will not be allowed to leave this meeting until you sign") didn't need them ... the whole point was that the Treasury wasn't signaling to the market which companies were at death's door (e.g. three time loser Citibank) and which were OK (e.g. Goldman).