AIG Bailout Overview

I was lying awake the other night, worrying about all of the debt on my credit card. The jet ski, mink socks, the ATV, my new plasma TV, ruby encrusted dog food bowl, surround-sound stereo – they are great, but darn they cost a lot. And then it dawned on me: it wasn’t my fault! It was the credit card company’s fault! All of those radio ads that claim to help people “Get back at those credit cards companies” must be telling the truth. Seriously, yes, the credit card companies are guilty of making it easy to purchase goods, including necessities, and charging some pretty hefty rates, but they add liquidity to the economy. Really, who is responsible for spending beyond their means in the first place? Despite the radio ads, it is not the credit card companies, or the retail vendors…

AIG Bailout Overview
Who is AIG (American International Group), and why should you care about them? AIG is a worldwide conglomerate made up of hundreds of businesses all over the world, although many of AIG’s subsidiaries wrote insurance of various types. They are believed to be the world’s largest insurer in spite of not being a household name here in the US. Interestingly, the plan was to have business cycles in some businesses offset cycles in others, giving AIG a steady stream of revenue. Smart. Lately, as we all know, AIG is bogged down in the mortgage crisis, since:

(a) they insured many intra-bank and loans and mortgage securities, along with insuring complex mortgage debt derivatives, and

(b) some of its insurance companies own large mortgage-backed securities holdings.

The Fed believes that the complexity of AIG ‘s business, and the fact that it does business with thousands of companies around the globe, make its survival critical. The US government, thereby the taxpayer, loaned them $85 billion for two years and now owns 79.9% of AIG! (Along with 100% of Fannie and 100% of Freddie.) Taxpayers are all hoping for a rally in AIG’s stock!

Mortgage lock volumes & economic news
Were you calling your broker to lock a rate last week? Join the crowd. As pipelines move among lenders (which may eventually catch up with them!) the MBA Mortgage Applications Index showed a 33% increase over two weeks ago. Refi’s almost doubled, up 88%. Purchase applications were up 2.4%. Housing Permits, which were announced today, dropped to a 26-year low. Starts of new homes fell 6.2% to the lowest in 17 years, and much weaker than expected.

Today’s rates
Lehman is peeling off parts of their business. For example, Barclay’s reportedly purchased their investment bank and trading operation. Oil is up $3 per barrel, and the Fed left overnight rates unchanged. How is the market reacting to all of this? Treasury rates are down more (the 10-yr is down to 3.36%!) but 30-yr fixed rate mortgage prices are worse by about .250. As one dealer put it, “A flight to quality right now means U.S. Treasuries, not mortgage-backed securities.” Expect the meaning of ‘flight to quality’ to be parsed from now on since MBS are now Treasury securities for all intents and purposes.

Humor du jour
As I careen towards retirement, I saw a story that the Senate is investigating deceptive sweepstakes practices.
These companies target the elderly and make them think they will receive sums of money, but in reality senior citizens never see any of it.
The most popular of these scams is called “Social Security”.