Saturday’s headline in the New York Time’s Business section reads:
A.I.G. Planning $165 Million in Bonuses After Huge Bailout
The Times goes on:
WASHINGTON — The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.
So I’m reading, trying to understand the story behind the story…how a company like A.I.G. could get itself in a situation like this.
The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds backed in many cases by subprime mortgages.
A phrase catches my eye, I don’t understand what it means, so I Google “credit default swaps”, the apparent evil behind A.I.G.’s financial difficulties:
A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults.
I still don’t understand what I am reading, but I push on regardless, determined to get to the bottom of this whole financial crash, and a glimmer of understanding begins to form. For lack of a better word, this is speculation, maybe even gambling, and the pay off immense…staggeringly immense, if those credit risks (in this case subprime mortgages) are not paid off and go into default.
So a credit-default swap is a package of loans (which may include a number of subprime loans) sold off to investors who will enjoy immense gains if those loans default?
Who came up with this?
Is this that deregulation that Democrats have been screaming about?
Is this part of what Charles Schummer described as the “deregulatory zeal by the Bush administration”, which “led us down a short path to economic recession”?
I Google on…then this:
Credit Default Swaps became exempt from regulation with the Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole.
But wait…Act of 2000…Bush took office in 2001.
The Modernization Act was rushed through Congress as a companion bill to the omnibus spending bill, the last day before the Christmas holiday. It by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes. The omnibus spending bill, which was 11,000 pages long, is the financial plan the government requires for everyday operations. President Clinton signed the bill into Public Law (106-554) on December 21, 2000.
Why is it that every time I dig into the muck at the bottom of a government mess, I always find Bill Clinton?