How policy owners were able to survive the fall of AIG

The financial correction of 2008 is undoubtedly one of the most memorable events in US history. Several companies fell at that time including financial giants AIG and Lehman Bros. We all know the story of how the credit lines of these companies were extended by the Federal stimulus, which came to over $800 billion up front.

Most people think companies like AIG fell because of financial insolvency. This was not the case at all. AIG fell because of the risky security side of the business that was offering products like mortgage backed securities, and betting on whether or not they would fail. Since the mortgage backed securities were based on leveraged assets, those losses got too big too quick. It was the financial collapse of these toxic assets that sent AIG scrambling to pay off losses. In order to help pay off the losses, the Federal Government extended AIG’s credit line on two separate occasions.

However, the insurance sector of AIG (outside of the securities division) was very profitable. Insurance products like annuities and life insurance were major contributors to AIG’s profits prior to the collapse. This is because these products are based on a concept of absolute protection; a concept that provides financial protection while being able to take advantage of a moderate return.

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How deregulation gave way to a global financial collapse

Today, Wall Street still adamantly opposes regulation; and many of the same people who helped contribute to our financial collapse on a global level are still in power. In fact, many of these individuals were able to walk away from their bankrupted companies with up to hundreds of millions of dollars, all while many portfolios and retirement plans were completely destroyed. 

Prior to 1980, there had not been a major financial collapse in the market since the Great Depression. Protective measures had been put in place to help shield investors from heightened periods of volatility. 

For example, commercial banks who received deposits for basic checking or savings accounts were prohibited from offering risky investments such as mutual funds. These were the days prior to adjustable rate mortgages and predatory lending. All of these measures were put into place by the Glass Steagall Act of 1933, after our country survived the Great Depression. At least that’s the way it was until 1980. 

In 1980, President Jimmy Carter signed into law the Depository Institutions Deregulation and Monetary Control Act of 1980, the first of two measures put into place that would eventually set the stage for the world’s first global recession. This new act gave unprecedented opportunities to the banking world. The act allowed banks to merge together and took away the restrictions on what a financial institution was allowed to charge as an interest rate. 

The act also gave birth to the second mortgage, eliminating the first lien restrictions on mortgages. Furthermore, banks were allowed to pay whatever rate was deemed appropriate by the bank. CD rates offered in the 1980s were exceeding 15 percent, the highest CD rates ever charged in U.S. history. 

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