AIG ignited the national firestorm of rage with its shell-out of $160 to $600 million in tainted bonuses to its tainted executives.
But what has gotten almost no attention is a big reason that AIG had to stiff the government and everyone else. That’s the role that the company played in the sub-prime loan racket; a racket that hurt, and still hurts, tens of thousands of would-be black and Latino homeowners.
The lenders’ bait-and-switch tactics, the deliberately garbled contracts, deceptive and faulty lending, questionable accounting practices, and charged hidden fees, all with the connivance of sleepy-eyed, see-no-evil oversight of federal regulators, are well known and documented.
Their snake oil loan peddling wreaked havoc with thousands of mostly poor, strapped homeowners. A disproportionate number of them were Latinos and African-Americans.
Enter AIG.
It saw a treasure trove of fast-buck riches in the sub-prime business. AIG dumped $33 billion into bonds and securities that were tied directly to sub-prime loans. This was nearly four times more than the next insurer, the German-based Allianz SE, had invested in the sub-prime loans.
Start of Their Troubles
In fact, AIG was the only U.S.-based life insurer that had more than 3 percent of their general account assets in debts tied to sub-prime loans.
In early 2007, things started to unravel. AIG reported a first-quarter loss of more than $2 billion in its sub-prime mortgage bonds. This set off the first warning bell that AIG could implode. Bond traders openly worried that AIG’s sub-prime securities losses could drag the market down. They had good reason to worry.
AIG is, first and foremost, an insurer. And in addition to its plunging bond and security holdings, the company also insured restructured sub-prime home bonds.
The assumption by the sub-prime bond- holders was that the bonds would lose only a fraction of their value. But by then, sub-prime defaults had piled up to a 10-year high and the sub-prime lending market, that was all of its stocks, bonds and insurance, had badly frayed.
The Straight-Down Plunge Accelerates
AIG’s stock had plunged 60 percent within the year. The top rating agencies, Moody's and Standard & Poor's, concerned over AIG’s continuing losses on sub-prime and other mortgage-backed securities, downgraded their credit rating. They demanded that the company pay billions to creditors in order to bump back up their ratings. That was billions that AIG, by then, didn’t have.
AIG was clearly on a non-stop, downhill, roller-coaster ride. Many banks and lenders were heading to perdition with them. AIG briefly flirted with the notion of filing for sub-prime mortgage lenders’ bankruptcy. But there was a better deal to be had, courtesy of a panicked President Bush and Treasury Secretary Henry Paulson. They shoved out tens of billions in cash in what turned out to be only the first installment of cash to save AIG’s hide.
We may never know the full extent of the financial damage that AIG caused in the sub-prime market. Nor how many prospective minority homeowners suffered losses, both financial and personal, from the company’s greed.
The Worst Ever
United for a Fair Economy, a public advocacy research group, in an in-depth study on sub-prime lending, estimates that the tab for minorities for the dubious lending practices runs to more than $200 billion in lost equity and income during the years AIG and the sub-prime bank lenders ran amok.
The group called the home losses the most massive loss of wealth for African Americans in U.S. history.
The ultimate tragedy is that many blacks, who were enticed by the lenders through their web of lies and deceit into taking the risky sub-prime loans, didn’t really need them.
Data from the Home Mortgage Disclosure Act found that about 40 percent of the black sub-prime borrowers could have qualified for cheaper mainstream mortgages.
But that was the last thing that the sub-prime lenders, let alone AIG, wanted. This would have taken a big bite out of their fantasy level profits. In the end, those profits turned out to be a smoke-and-mirrors illusion, just as the subprime illusion was.
AIG happily aided and abetted the banks and lenders in their decade-long fast and loose play with the lending rules. Taxpayers are, of course, paying, and paying dearly, for AIG’s greed and malfeasance. But thousands of blacks and Latinos, who hoped to be homeowners, are also paying for that greed. AIG’s minority racket is yet another sorry chapter in the AIG saga.
Earl Ofari Hutchinson is an author and political analyst. His new book is How Obama Won (Middle Passage Press.)
