Sunday, March 21, 2010

Who Drank the Spicy Soup

So there is one remaining question to answer: who drank the spicy soup? If the effect of securitizing all of this mortgage debt was to create more risk than we could handle, who ate that risk and ended up with a case of indigestion?

To quote top gun, the list is "long and distinguished". (Wikipedia has a chart but I'm not convinced it is accurate.

First: the investment banks.
  • Lehman and Bear Sterns dropped dead. While their losses weren't huge, they didn't have the capacity to sustain much damage either.
  • Merrill Lynch lost the most - almost $30 billion. I'm sure Bank of America feels good about that purchase. ("We want to be just like Citi - flat broke!")
  • Goldman apparently didn't lose anything, although Goldman's financials can be opaque at best. They shorted the market at the last minute to offset losses - on the other side of that bet: AIG
Of course if the Wall Street investment banks are dumb, you know someone has to be dumber.
  • UBS managed to lose $37.7 billion. They were one of the big suckers at the table.
  • Citigroup lost $39.1 billion - their strategy of creating toxic waste, then keeping the toxic part didn't work well.
  • Bank of America lost $7.95 billion. I believe this is the losses they earned the hard way, not the losses they "bought" by buying Merrill before Merrill's losses were fully disclosed. Note that they also own Countrywide - clearly BoA has a talent for aquisition.
  • Washington Mutual and Wachovia both went under and were sold off (to JP Morgan Chase and Wells Fargo, respectively).
Finally we have the insurance companies. Since insurance companies "sit" on your premiums while waiting for something bad to happen, they are natural buyers of securities. Some insurance companies are crazy enough to try to insure financial products. Both MBIA and AMBAC had multi-billion dollar losses, but the big whale, the big sucker at the table was AIG, who have lost over $100 billion dollars since the crisis hit. Don't worry, though, you and I have their backs.

If you want a short list of suckers, basically it's:
  • AIG, who bet wrong on sub-prime for the first half of the housing boom.
  • Citigroup and Merrill Lynch, who were dumb enough to keep their own toxic waste. (Bank of America has managed to buy plenty of sick companies, so Citi and BoA are now the dynamic duo.)
  • UBS, who bought toxic waste late in the game.
Of course, the real sucker is you and me, because it's our tax dollars bailing out AIG, Citi and BoA.

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