As China flees US investments, why is the Fed and Congress continuing to prop up AIG?
On Monday, China dumped a huge chunk of its U.S. residential mortgage holdings held by HSBC bank. Meanwhile, AIG, another China-centered global institution, received a further $30 billion tranche atop the $150 billion that have already paid out of the U.S. Treasury to keep that global insurance giant afloat.
Stock values for both firms dropped, dragging down markets worldwide. Of the two, the continued slide of AIG -- despite the hundreds of billions already helicopter dropped into it -- is the more troubling. The shut-down of HSBC’s residential mortgage unit announced Monday may actually be a good thing for distressed American homeowners.
What do these back-and-forth moves with America's second largest trade partner tell us about where the economy is going? What is foreign capital doing behind the scenes - are they helping or standing in the way of economic recovery?
Find out below the jump.
AIG: Still on the American Dole
There are two problems with the ongoing AIG bailout, and neither of them have to do with protecting life insurance policy holders in the United States. First problem: American International Group (AIG) is misnamed - AIG is actually a huge China-based market-maker for Mortgage-Backed Securities (MBS) and Credit Default Swaps (CDS)
Second problem, a lot of people in DC and on Wall Street think that AIG needs to be kept afloat to sustain prices in unregulated secondary markets and the institutions that bought heavily into them during the Bush years. http://www.nakedcapitalism.com/...
AIG was actually established in China by Hank Greenberg, who is to China what Armand Hammer was to the Soviet Union, a primary conduit for Chinese investment and influence in the U.S. See, http://www.democraticunderground.com...
The fear is that if AIG goes down the portfolios of many other banks and companies that bought MBS and CDS are going to implode. Wall Street would obviously prefer that the Federal Gov't step in and guarantee what remains of the value of these derivatives.
The other terror is that unless the Fed keeps pumping dollars into AIG and backing up the value of firms holding MBS and CDS, the Chinese will pull up stakes in the American economy and the market for US financial instruments, including federal bonds, will also implode.
Those fears are not well-founded and like many things on Wall Street, much too hyped. It makes much more sense to just cancel both sides of the most speculative forms of swaps contracts. Derivatives trading should be regulated and some forms, such as naked swaps and pure unregulated third-party speculation by hedge funds in defaults, should simply be outlawed. Those institutions that are so over-leveraged and insolvent that they can't restructure their portfolios without AIG's "risk managment" products will probably fail, regardless, and should be nationalized. As for the Chinese, their position is interlocked with ours. If we go down, they'll be swallowed up along with us, and vis-a-versa.
As for keeping the secondary markets for mortgages going, that sort of bailout may be something that we’re all stuck with. Unlike swaps, houses are something that Americans actually need.
HSBC: Back to China
HSBC was founded 150 years ago by British investors as the Hong Kong and Shanghai Bank. Today, it is both the largest bank in Europe by assets, and the largest Asian bank listed on a stock exchange outside China. It operates as does AIG, as the global conduit for the flow of foreign investment and dollar returns back to China. In these times of deep distress and losses on western holdings, HSBC is retrenching back to China. See, http://www.bloomberg.com/...
The value of HSBC, traded on the London and Hong Kong stock exchanges fell nearly 20 percent yesterday due to mounting losses in its U.S. mortgage operations, which the bank announced are being shut down. In 2003, HSBC took over Household Finance (dba, Beneficial), which became an aggressive player in subprime mortgages. Related write-offs have resulted in at least $13 billion in U.S. mortgage related losses. Cash-starved HSBC was forced to close down its U.S. mortgage units and water-down its stock by a $18 billion "rights" offering on European and Asian exchanges yesterday. http://www.iht.com/... Look at what’s happened t European and Asian exchanges as the American mortgage and middle-income crises spreads outwards to global money centers. They all lost at least four percent. We're all tied together in a terrifying global plunge in over-inflated assets and equities values.
HSBC is commonly referred to as the largest bank in Europe, but HSBC is actually the initials of the Hong Kong Shanghai Banking Corporation, and it was the largest issuer of subprime and endangered Aa mortgages in America, the massive defaults of which has left Fannie Mae and Freddie Mac (FM/FM) holding the bag, contributing to the massive downfall and forced nationalization of those government securitized entities.
Foreign Bond Holders Resisted Homeowner Protections
Unlike some other lenders, HSBC did not seek TARP money, which would have entailed compliance with some limited mortgage relief measures attached to that law, because HSBC is not a U.S.-based firm. However, that bank did act as one of the biggest resellers of FM/FM mortgages through its HFC/Beneficial retail outlets, which marketed aggressively to subprime customers.
When those risky mortgages failed, FM/FM had to guarantee the losses. Effectively, the U.S. Treasury paid out to a Chinese and European-owned company money for loans that bank had signed. Like most mortgage providers, HFC/Beneficial refused in most cases to modify its loans, and got to seize and hold those properties in foreclosure. That was the most common outcome for distressed homeowners during the Bush era. The effect was that the U.S. guaranteed returns on the US real estate holdings of its 2nd largest trading partner, as millions of Americans lost everything.
What has happened since November is a growth of spine in Washington, and a determination that the federal government must put a stop to the interlocked death-spiral of middle-class incomes and foreclosures. Declining wages and mounting losses of homes are entirely related. See, http://mortgagestats.blogspot.com/...
Some relief may be coming this week, when FM/FM issue new guidelines for foreclosure relief regulations. Mortgage companies have already started soliciting business from homeowners endangered by foreclosures. New incentives are being offered to mortgage lenders to make mortgage modifications that would bring down principle owed to prevailing market values and reduce interest rates. Some distressed homeowners holding FM/FM-backed notes may be eligible for caps on monthly mortgage payments of no more than 38 percent of monthly income. Up until now, mortgage-lenders – including HSBC – have in almost all cases resisted writing down loan amounts.
This resistance has been in large part because holders of mortgage-backed bonds on Wall Street saw large-scale loan modifications as a threat to the value of their MBS. However, the mortgage crisis is now so severe that homeowner relief is being viewed by the Obama Administration as necessary to prevent a further melt-down of the entire mortgage industry. HSBC and its foreign backers have recognized this change, and are now cutting their losses. The flight of HSBC is a big signal to the rest that a large-scale adjustment in overinflated American real estate values is now under way, and that Wall Street will be required "to put skin in the game". Homeowners can not continue to carry the burden.
The bailout of AIG is thus more complicated than simply sustaining its insurance operations. HSBC's write-off of HFC/Beneficial is a signal that the American real-estate bubble is flat, and big foreign investors do not hope to squeeze much more money out of it. These developments are part of a struggle between the U.S. and its Chinese and European business partners over who will carry the burden in the next part of the coming economic adjustment.
AIG should now be liquidated – not propped-up -- and its legitimate insurance operations spun-off. Further bailouts of AIG are just throwing money down a bottomless pit until it reaches China. There is no value to the AIG bail-out other than paying extortion to the Chinese banks and insurance companies to hold onto their Treasuries, dollars, and other U.S. assets.
On the other hand, it may actually be a good sign to see the Chinese and their European money-center banks fleeing the American residential mortgage market – it means the federal government is about to put some resources into assisting distressed homeowners, and can now do so without outside pressures resisting help to ordinary working Americans.
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