Word: defaultations
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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...
...until the principal on the loan was satisfied. This approach made for a relatively illiquid market for the buying and selling of loans. Accordingly, this system insured that lenders were unable to sell their loan portfolios easily. Market illiquidity exposed the lender to the risk that individual loans would default or that rising interest rates would force the lender's interest cost higher than its income on the individual loan...
...according to HSBC. The main reason: Norway's budget and current-account surpluses are the biggest among nations with the 10 most traded currencies. Factor in the country's $350 billion sovereign wealth fund pumped full of the country's oil revenues, and the cost of insuring against government default in Norway - a key measure of a currency's safety - is the lowest of those countries. With Norway's output expected to shrink by a modest 1.2% this year, far less than in most of the world's leading economies, the krone, HSBC said, represents "the ultimate safe haven...
...handle massive portfolios of business, real estate, and consumer loans - especially credit cards. That fact seems to have been lost on investors buying bank stocks during the last week. Most money center banks have substantial exposure to debt in Eastern Europe. A lot of that debt may go into default if the economies of the small countries in that region fall apart. They do not have institutions like the Federal Reserve to flood their countries with liquidity. (Find out 10 things to do with your money...
...September and the bonus promises would have been torn up. AIG was not allowed to go bankrupt because Lehman Brothers had just failed and the people at the Treasury Department and the Federal Reserve worried (with reason) that another failure - in particular, the failure of a firm that wrote default insurance for banks around the world - might wipe out the global financial system and unleash an economic catastrophe far worse than what we're going through now. In short, the people at AIG FP, the very division that wrote the default-insurance contracts that dug AIG into such a hole...