RBA, AIG and GSEs

Well, a few pieces of news over the past few days. The RBA decided to wait and see for how things will turn out. I'd actually thought they would cut by 25bps, but I suppose it's not a big difference. The idea is that so far in recent weeks the data that came out wasn't all that bad - no collapse in house prices and unemployment stayed low. Today our GDP figures are due to come out, but expectations are that they're about flat or maybe slightly positive. Given that interest rate cuts take a little while to feed through the system and actually make an impact in the economy, they figured this was a good time to have a breather and take stock. Which makes sense now, but might look a bit silly a few months from now when unemployment spikes and we're in a recession...I still don't think there's a realistic chance of avoiding at least a short one, given that pretty much all our trading partners are there already.

Anyways, here's some news and opinion on it:
http://www.rba.gov.au/MediaReleases/2009/mr_09_05.html
http://www.businessspectator.com.au/bs.nsf/Article/A-small-sigh-of-relief-$pd20090303-PS6MH?OpenDocument&src=sph
http://www.businessspectator.com.au/bs.nsf/Article/The-RBAs-wait-and-see-approach-$pd20090303-PS7EE?OpenDocument&src=sph
http://www.businessspectator.com.au/bs.nsf/Article/Back-after-these-messages-$pd20090303-PS7SL?OpenDocument&src=sph

The other news came from AIG in the US. After being saved from complete collapse shortly after Lehman's death, they've been suffering. In fact, if you look at the numbers, in 2008 AIG lost an average of US$27.9 million an hour. That's impressive no matter which way you turn it. Here's a bit of background: AIG is a normal insurance company, one of the world's largest (maybe the largest, actually) and supposedly quite safe. Unfortunately, they thought they had things worked out in financial markets, and got into insuring bonds against default. From there it was only a small step to writing CDS (Credit Default Swap) contracts. The idea is that you write and sell the CDS to someone, that someone pays you a percentage of the face value every so often, and in case some third party defaults, you have to pay this someone some sum of money. So it is essentially an insurance against default, to be bought by someone who would lose if this third party couldn't pay its bills. Good idea in principle, but as most things in this crisis, it was misused.

AIG relied on its own ratings and those of ratings agencies who figured that companies like Bear Stearns, Lehman Brothers, Fannie and Freddie, Merrills, GM, Ford etc etc would never ever go bankrupt. So they wrote lots of CDS contracts on those firms, which were then put through the process of financial engineering that made things more complicated: SIVs, CDOs, CDO-squareds and all the rest of them.

Essentially no one at the top at AIG understood that this one department of the firm (probably just one desk within that one department) was taking on liabilities large enough to destroy the entire company. The strategy paid off big money while everything was okay (all the holders of these CDS were afterall paying their regular fees to AIG, and there were commissions to be made), and then suddenly went horribly wrong when these companies actually started going bust.

So now the US taxpayer has been called to the rescue, and I can understand why Bernanke at least is particularly annoyed with this one. Of all the stories in this crisis (with the exception of Maddoff and the Merrill bonuses, perhaps), this is the least justifiable: http://www.bloomberg.com/apps/news?pid=20601087&sid=aHx9vZa0IJAo&refer=home

On the other hand, if you don't act like a bunch of idiots, there's still money in this stuff. JPM is coming out of this looking quite good, I have to say: http://www.bloomberg.com/apps/news?pid=20601109&sid=a96UdT6uCOcA&refer=home

There's also been a little bit of progress on the housing/mortgage rescue of the Obama administration. Here's the plan so far: http://www.treas.gov/press/releases/tg33.htm

Rather than go through all the details myself, I'll just post two excellent articles by Christopher Joyce on the issue. Essentially he argues that the seeds for the mortgage-based part of this crisis are to be found in the structure of the banking industry in the US, which is in turn the result of regulatory restrictions and left-over "emergency" measures and institutions the government created after the Great Depression. Somewhat predictably, the White House in its plan isn't doing anything to address this, but prefers to try to patch up this unsound system and leave it at that. But have a read yourselves, it's a bit long but definitely worth it:
http://www.businessspectator.com.au/bs.nsf/Article/Joye-$pd20090226-PM69X?OpenDocument
http://www.businessspectator.com.au/bs.nsf/Article/Barack-Obama--hope-or-hyperbole-$pd20090303-PRT4K?OpenDocument&src=sph