Word: markets
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Dates: during 2000-2009
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...press coverage, the AIG compensation matter is a sideshow because the economy remains in a nosedive. The current financial difficulties makes retroactively changing agreements between the government and private companies a risk as the Administration tries to enlist private enterprise to help consumer lending by reinvigorating the securitization market...
...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...
...Except for some contract lawyers, very few people would argue that the portion of the AIG bonuses that was for employee retention are fair. The only reason the company isn't in receivership is because the government deemed it was "too big to fail." Fearing the financial market would be dealt a horrible blow if it went bankrupt, the government has provided AIG with several loans to prevent its untimely demise...
Before 1970, banks were content to make loans to consumers and business which remained on their books, collecting interest 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...
...Asset backed securities ("ABS") gave banks the opportunity to bundle loans into a pool that could then be sold to other banks. The bank purchasing the loans would then hold them as an investment or 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...