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.