Things I Don't Understand

[scaryblackdeath]

So I actually passed Econ 100 (or 101?) in college, and I like to think I generally understand stocks and supply & demand & stuff, but I really can't claim to understand larger financial stuff. It's just not my strong point. So I turn to you, my collective of smart and/or knowledgeable friends, to explain it to me in terms I can understand

Comments

[dunia]

1-3 are linked. I don't actually agree with the guy above who said that AIG created financial instruments--they just insured them

[creamer_boy]

Like many conglomerates in the wake of the deregulation push that started in the 80's, AIG is a financial services firm. They're not just insurance, as they have their own proprietary fund group and wealth management services division.

That having been said, insuring against loss in the case of a loan default IS an insurance matter... but when you take that policy and securitize it into a derivative like a Credit Default Swap it becomes a financial instrument all its own.

[dunia]

For 4, there is undoubtedly legislation that could be pushed through that would stop the contractual payout of bonuses. Criminal negligence certainly isn't the way to deal with it, since that would imply that you are either criminally charging people who are getting bonuses, or criminally charging people who wrote the original contracts. Since bonus contracts were written completely unrelated to the current situation AIG is in, it doesn't make much sense to prosecute the company or members of the company for writing up bonus packages that were perfectly acceptable prior to this unforseen event. Effectively, the only reason anyone cares about these bonuses is because of the bailout money, and so criminally charging people for creating contracts that wouldn't have been an issue at all outside of unforseen circumstances is, quite frankly, pretty shitty

[scaryblackdeath]

Question on that, though -- can the gov't legally create such regs to affect these bonus obligations after the fact? I've already seen Barney Frank saying that there have been steps taken to make sure this doesn't happen in the future. Whether or not he's just politicking by saying that, I'm sure it's possible. But can the gov't really create a law or regulation to get this money back when it was paid out to hold to a contract written before said law/regulation existed?

[dunia]

As far as I know, the government can create almost any kind of legislation. I would guess the problem is more that you don't really want to get into the business of creating retroactive rules, which could open a can of worms (how far back should they have to repay bonuses?). That's probably more a question for the lawyers, though--I'm not too familiar with the rules around retroactive legislation.

[dunia]

For 5, banks have basic capital requirements that they must maintain in order to do business. They also have to adjust their cash level depending on the likelihood that depositors will come to collect their money. Right now, a bank run isn't outside the realm of possibility, so banks need to have reasonable cash reserves. Unfortunately, many of their sources of income (like loan payments and reselling loans) are drying up. So, the injection of cash into the banking systems means that the banks will be more likely to have the capital they need to feel comfortable starting to give money out again. It is likely to make a huge difference in their behavior.