Tuesday, March 17, 2009

Did “The Steamroller” Help Trigger the Credit Crisis???

The closer you look at the star-crossed tenure of former NY Governor Eliot Spitzer, the worse that train wreck looks.

Most of AIG’s problems began after March of 2005
after the company's board buckled under pressure from then New York Attorney General Eliot Spitzer and fired longtime CEO Hank Greenberg.

As the WSJ reports, “Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.” AIG itself later reversed many of the other elements of the restatement, but the damage had been done. The restatement triggered more credit ratings downgrades.

As the WSJ reported, “Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing," by issuing Credit Default Swaps (CDS’s are veritable insurance policies on investments) to Merril Lynch, Bear Stearns and other major institutions, that bolstered their own appetites for risk.

If nothing else, Eliot Spitzer’s actions seemed to contribute to a “perfect economic storm,” his scorched-earth, witch-hunt tactics cowed major Corporate institutions, like AIG, lowering their bond rating and making it harder for such institutions to borrow money at preferred rates.

That inevitably led to those institutions taking on more risk (CDS’s in AIG’s case). As AIG took on more risk, by, in effect, insuring the high risks that other major players took, those institution’s appetite for risk grew, making the inevitable housing bubble bust far, far worse than it otherwise would have and should have been.

Apparently Ashley Dupre wasn’t the only one that “Client 9” (Spitzer's name in an affidavit filed in US Federal Court) was screwing over.

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