Monday, March 30, 2009

A Question For Secretary Geithner

Yesterday on MEET THE PRESS, Secretary Geithner was asked about securitization. In fact, the moderator David Gregory asked Secretary Geithner the same question about securitization twice. Neither time did Secretary Geithner answer his question about securitization. Why? I can not believe that Timothy Geithner does not know what securitization means, after all he was the head of the New York Federal Reserve Bank before coming to the Treasury Department. So, what is going on here?

Just for review, securitization is the bundling of home mortgages, car loans or even credit card receivables, and then made into debt instruments known as bonds. These bonds differ from corporate or municipal bonds that pay interest every six months and their principal at maturity. Mortgage bonds pay interest periodically and return principal periodically as mortgages are paid down and paid off.

It was the triple-A ratings on many of these structured asset bonds that lead to the bond market meltdown for these bonds, and these same bonds have been known in the press and TV as toxic bonds or toxic assets. Unfortunately for every one the rating went on before the quality went in. Many of these bonds that were made up of sub prime mortgages had no business receiving a triple-A rating.

To compound the mistake, insurance companies, like AIG, issued insurance policies, called credit default swaps, to protect bondholders against default of the triple-A rated bonds, made up of the sub prime mortgages and other loans that were bundled (securitization). A bit of irony is that the same investment bankers that did the underwriting of the sub prime mortgages, and shopped the credit rating agencies for the triple-A rating, were the same people to be paid off when AIG received the government bailout to make good on the credit default swap contracts that they so greedily underwrote.

That is why some people are upset that the companies that received full payment from AIG on those credit default swap contracts that AIG sold, were none other than the same investment banks that were receiving government bailouts too. Yes, Head I win, tails you lose!

Securitization is a financial tool. Used properly, correctly and with meaningful credit ratings that are not shopped by the underwriters, securitization can be a very useful financial tool in growing our economy. The fact that Secretary Geithner did not answer David Gregory’s question is puzzling nevertheless. Perhaps, Secretary Geithner knew if he answered the question about securitization that the next question to follow would not be so tame.

Stay tuned.


moneythoughts said...

I just read your post for today, and it is like chewing on cardboard. Can't you make this shit any more sexy?

LceeL said...

Talking to yourself, Fred? I actually enjoyed the clearer understanding of a) the bonds and b) credit default swaps.

Butch said...

Like others have said, I do learn from your postings. For me, bonds are the hardest thing to understand outside of one or two other items in this mess. One is that I am not sure that I like Geithner and two is I do not understand why he was chosen when there appears there were others that could have been in the running. People are screaming about Tom the tax dodger Daschle but not Mr Geithner who was also caught in the "oh did I forget to pay those".

moneythoughts said...

I took the day off as I took my BMW in to get new brakes.

I am puzzled by the fact that no one is talking about the credit rating agencies. Except for the one front page article in the Sunday New York Times on December 14, 2008, I have not seen or heard a word about the CRAs. Either something is a foot in the administration about these guys, or no one wants to tackle the problem. I wonder if the European leaders will say something to Obama in private about how the CRAs along with the investment bankers on Wall Street created a fraud of world wide proportions? Giving billions of dollars worth of structured debt obligations (bonds) a triple-A rating when no triple-A rating was deserved lead to an expansion of credit around the world and sucked in investors ("marks") from nearly every country around the globe. What will Obama say when he is asked about that?

Butch said...

Speaking of your breaks, do you think Obama Auto will give employee discounts like the former owners did?

Will we be dealing in euros in the near future?

Even though Barrack wasn't in office, some of those that he now has ties to in his posse were in the business and definitely had the ability to blow a whistle or two but opted not to. Probably for the same reason that others opted to help establish the deregulation of the CRA's, greed.

winslow said...

The Obama administration no longer talks about "ethical" individuals in top posts.

I really wish Obama castigated all of the tax evaders and looked for educated, ethical citizens. Millions of these individuals are out there in universities and in legitimate business.

......or... is America really just a bunch of cheats