Word: creditation
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...Last year AIG admitted that the company's Financial Products division entered into credit default swap agreements with banks that bought and securitized loans. CDS are a financial instrument that mimics the characteristics of an insurance contract. These instruments were most exposed to risk when the securitization market blew up following the housing market collapse. Not only is the company almost entirely owned by the government, but many of the executives receiving the bonuses are the same executives that marketed the CDS agreements that caused its downfall. (Read "Treasury Learned of AIG Bonuses Earlier Than Claimed...
...Judging by current unemployment figures and mortgage delinquency rates the economy is getting worse as each month passes. According to TransUnion, a leading consumer credit reporting agency, mortgage loan delinquency, traditionally seen as a precursor to foreclosures, increased for the eighth quarter in a row. This statistic is up approximately 53% from the same period last year. Likely contributing to that rise, unemployment rose in February from 7.6 to 8.1%. And a new Reuters poll of economists forecasts that unemployment will top 10% as early as next year...
...Worse still is the availability of credit in the economy in general. According to the New York Times, "By one estimate, as much as $1.9 trillion of lending capacity - the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck - has been sucked out of the system." Based on these figures the government's programs have yet to reach the American public...
...resell them in the secondary market. This market improved the ability of banks to lend by transferring the risk of the loan default to a third party while providing financing to the bank to make new loans. In time, the public grew accustomed to the increased availability of credit. (See pictures of the printing of money...
...There are other credit enhancement techniques which securitzers have employed to improve the credit rating of ABS. Because individual AAA-rated loans are, by themselves, in the minority, in order to create AAA-rated ABS, a securitizer would bundle loans of different ratings and place those same loans into different investment classes, known as tranches. Although the individual loans that comprise the tranches remain disproportionately below AAA-rated, because of how tranches work, they will receive different credit ratings, some AAA-rated...