reason for this requirement of transparency and the cutting edge of
claiming or clawing back the illicit profits is simple: in a true fair
and free market, the lender would know his risk and the borrower would
understand the terms. Both would be on alert if unusual fees, profits
and kickbacks were known to be present and would seek other
arrangements. So TILA is really meant to protect both the borrower
(primarily) and any would be investor advancing the real money.
is a project for someone out there and a rich topic for forensic
analysis for those who are not timid about securitization. I know Brad
is planning to address this in the forensic workshop along with other
speakers (including me). Research
the AIG liabilities, who is making claims and who is getting paid. As I
have stated numerous times on these pages, the hapless investors
advanced money under the mistaken notion that their risk was insured.
They were not mistaken about the presence of insurance and hedge
products, but they were easily misled as to who received the benefit of
the insurance — middlemen (investment bankers included) who sold them
the mortgage backed securities. And they were easily misled into
thinking that their money was being used to fund mortgages. Much of the
money investors advanced went to pay fees, profits and premiums for
insurance that paid off handsomely to the investment banker or some
other party in the securitization chain.
You might ask “what difference does this make to the homeowner/
borrower?” The answer lies in TILA and other lending laws, rules and
regulations. Long ago laws were enacted to protect homeowners
from unseen unscrupulous and unregulated lenders posing through sham
relationships with shell corporations or through financial institutions
that would be paid a fee to pose as the lender. The transactions were
called “table-funded” because of the image of an unknown lender
reaching around the “lender” at closing and putting the money on the
table for the homeowner to borrow.
Reg Z and other
interpretations of TILA have made it clear that any pattern of conduct
involving table-funded loans is by definition presumed to be predatory.
And to stop this practice of hiding undisclosed parties and undisclosed
fees, the law provides for payment to the borrower of all such
undisclosed fees, profits, kickbacks etc. that were associated with the
loan transaction but not revealed to the borrower. And there are
provisions for receiving treble damages, interest, and attorney fees.
So now we get to the point. The payment of proceeds to any party in
the securitization chain on contracts or policies paid for from the
proceeds of the loan transaction would therefore be due to the borrower.
If another party gets and tries to keep the money (or title
or property) they are, in the eyes of the law, usually held to be
holding such money in constructive trust for the beneficiary (the
homeowner borrower). Obviously the amount of that payment
must be calculated by some professional with the information at hand as
to the amount paid to participants in the securitization chain where
your loan was used as the basis (along with many others) for the entire
But never lose sight of the fact that the basic transaction was simply a loan from the investor to the homeowner.
None of the investment bankers, servicers, aggregators, trustees etc
were parties in interest to your transaction with the investor. Thus
none of them has the right or power to retain any proceeds, property,
title, fees, profits, kickbacks or anything else unless it was
disclosed to you and you agreed to it.
The reason for this
requirement of transparency and the cutting edge of claiming or clawing
back the illicit profits is simple: in a true fair and free market, the
lender would know his risk and the borrower would understand the terms.
Both would be on alert if unusual fees, profits and kickbacks were
known to be present and would seek other arrangements. So TILA is
really meant to protect both the borrower (primarily) and any would be
investor advancing the real money.
The glitch here is
that I think the investors have claims against the same money paid to
Goldman et al and that a court determination needs to be made as to how
to allocate those proceeds. One thing is sure — the answer must not and
cannot be that it is the intermediaries who never had any risk in the
game and who were getting paid every time the money or “asset” was
presumed to move, whether that was actual or just an illusion.
A.I.G. Posts Loss of $11 Billion on Higher Claims
The American International Group
said on Friday that it lost about $11 billion last year, surprising
analysts and showing the long-term risks inherent in the types of
large, complex insurance coverage that the company once pioneered.
To increase its reserves to pay future claims, the company set aside
$2.7 billion on a pretax basis, accounting for a big portion of its
loss. This indicates that A.I.G. is experiencing significantly larger
claims than it expected when it sold the insurance, most of it more
than seven years ago, long before its government rescue in late 2008.
responded by putting the company’s property and casualty subsidiaries
on a negative watch for their financial strength ratings. Financial
strength ratings are indicators of an insurer’s ability to pay claims,
and are separate from credit ratings.
Shares of A.I.G. fell nearly 10 percent Friday, or $2.74, to close at $24.77.
Officials of A.I.G. said claims were growing faster than reserves in
just two lines of insurance and emphasized that it still had ample
resources over all to pay claims.
A.I.G.’s chief executive, Robert H. Benmosche, said in a statement
that despite the losses, “Our team has made great progress during the
year in executing our strategic restructuring plan.” The plan involves
shrinking the sprawling company to a more manageable size, and
generating money to repay the federal government.
As a bright spot, Mr. Benmosche cited a rebound in the annuities sold by its life insurance companies.
The insurer’s 2009 result was just a small fraction of the
record-breaking loss of $100 billion that it reported for 2008, when
its large derivatives portfolio nearly toppled the company, leading to
the government bailout.
Much of last year’s loss came from a fourth-quarter charge taken to
reflect a restructuring of its bailout — a one-time charge that A.I.G.
has been warning about for months. As part of a debt-for-equity swap
with the Federal Reserve Bank of New York,
the company removed part of its Fed loan as an asset on its balance
sheet, producing a pretax charge of $5.2 billion. That charge was not
connected with the company’s core insurance operations.
But the increase in reserves shifts attention to the insurance
business. When insurance companies find that the reserves that they
have set aside to pay future claims are inadequate, they take money
from earnings to add to their reserves.
A.I.G. said it was advised to do so by its own actuaries and outside
consultants after a thorough year-end review. The step seemed to
vindicate, at least in part, a study last November by the Sanford C.
Bernstein & Company research firm, which found a big shortfall in
A.I.G.’s reserves for its property and casualty businesses.
Those businesses have been renamed Chartis and are expected to be
the backbone of the company after its revamping. The company said the
additional reserves were all for Chartis.
The Bernstein analyst, Todd R. Bault, had predicted that A.I.G.
would have to “take some kind of a reserve charge” before it could
offer shares of Chartis to investors, as it has said it would do to
help raise money to pay back the government. He said the shortfall
appeared to be in lines of insurance where claims develop slowly, over
many years, like workers’ compensation.
Two lines of business accounted for about 90 percent of the addition
to reserves, according to Robert S. Schimek, Chartis’s chief financial
officer. They are excess workers’ compensation and excess casualty
When a company writes excess insurance, it offers to stand behind a
primary insurer, and pay claims if something so serious happens that
the primary insurance is exhausted. Such events are notoriously hard to
predict, and Mr. Schimek called it “among the most complex lines of
business to reserve for.”
Mr. Schimek said that the company significantly reduced selling
excess workers’ compensation in the early 2000s. But the claims from
business already on its books will take years to reveal their true
cost, he said.
The company’s best estimate of the reserves needed for all property and casualty business is now about $63 billion, he said.
The addition to the reserves and the restructuring of its federal
rescue package caused A.I.G.’s fourth-quarter results to be well off
those earlier in the year, when the company had even swung to quarterly
profits. For the fourth quarter, A.I.G. lost $8.87 billion, or $65.71 a
share. That compared with a loss of $61.66 billion, or $459 a share, in
the period a year earlier. Analysts surveyed by Thomson Reuters had forecast a loss of just under $4 a share.
In his statement, Mr. Benmosche said his team was “increasingly
confident” over the long term and the sale of its other businesses was
still on track.
A.I.G. plans to sell shares in its biggest international life
insurance company, the American International Assurance Company, on the
Hong Kong stock exchange this year. It has also been negotiating the
sale of another international life insurance company, known as Alico,
The talks have proceeded slowly because of questions about a possible
tax liability and who would pay it, according to people briefed on the
The first $25 billion in proceeds from those sales will be directed to repay the New York Fed.