AIG’s Minority Racket

Earl Ofari Hutchinson

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 subprime loan racket; a racket that hurt and still hurts tens of thousands of would be black and Latino homeowners.
The lender’s 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 subprime business. AIG dumped $33 billion into bonds and securities that were tied directly to subprime loans. This was nearly four times more than the next insurer, the German-based Allianz SE, had invested in the subprime loans. In fact, AIG was the only US based life insurer that had more than 3 percent of their general account assets in debts tied to subprime loans.
In early 2007 things started to unravel. AIG reported a first quarter loss of more than $2 billion in its subprime mortgage bonds. This set off the first warning bell that AIG could implode. Bond traders openly worried that AIG’s subprime 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 subprime home bonds. The assumption by the subrprime bond holders was that the bonds would lose only a fraction of their value. But by then subprime defaults had piled up to a ten year high and the subprime lending market, that was all of it stocks, bonds and insurance, had badly frayed.


AIG’s stock had plunged 60 percent within the year. The top rating agencies, Moody's and Standard and Poor's, concerned over AIG’s continuing losses on subprime and other mortgage-backed securities, downgraded their credit rating. They demanded that 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 down hill roller coaster ride, and many banks and lenders, were heading to perdition with them. AIG briefly flirted with the notion of filing for subprime mortgage lenders bankruptcy.
But there was a better deal to be had courtesy of a panicked then 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 subprime market. Nor how manyprospective minority homeowners suffered losses both financial and personal from the company’s greed. 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 blending practices runs to more than $200 billion in lost equity and income during the years AIG and the subprime 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 subprime borrowers could have qualified for cheaper mainstream mortgages.
But that was the last thing that the subprime 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 black and Latino 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, January 2009).

Democrats Hands Aren’t Clean in the Financial Mess

Earl Ofari Hutchinson

The normally expansive Democratic House Speaker Nancy Pelosi was anything but that when she was asked if the Democrats should get some of the blame for the Wall Street financial mess. Pelosi answered with a terse “no.” But Pelosi quickly got expansive when she finger pointed Bush and the Republicans for creating the mess. This is the standard Pelosi line. Bush and the Republicans eagerly cut sweetheart deals with financial industry lobbyists to gut lending and stock trading regulations, winked and nodded at the banks and brokerage houses as they engaged in an orgy of dubious stock swapping, buys, and trading, conned millions of homeowners into taking out catastrophic sub prime loans, and watered down the oversight powers of government regulatory agencies.
But Pelosi’s Bush rap is disingenuous. Democratic president Jimmy Carter and Congressional Democrats kicked off the rush to deregulate in the late 1970s when they cajoled Fannie Mae and Freddie Mac to relax lending standards for banks and S&Ls to provide more home loans for home seekers. Their goal was noble. It was to get the financial industry to loosen the lending purse strings to lower income and minority home buyers.

But relaxing the standards heightened the risk to banks and lenders and sent the signal that Democrats were willing to also relax regulations and oversight on banks and lenders. It was a short step from that to relaxing regulations and oversight on other financial transactions by the banking and brokerage houses.
It didn’t take long for Democrats and Republicans in Congress to take that step. Under relentless pressure from top bankers during the 1990s, Congress scrapped most of the provisions of the decades old Glass-Steagall Act. The Act was a Depression era measure that kept federally insured banks out of the go-go world of stock trading, exotic lending, and financial speculation. It also set rigid standards for mortgage lending and strict oversight over banking practices.

Clinton’s Treasury secretary Robert Rubin lobbied hard for dumping the Act. The rationale being that U.S. banks and brokerage houses needed to have the restrictions snatched off to stay competitive with Asian and European bankers and financial traders. President Clinton bought the line. The revision bill passed with bipartisan support in 1999 and Clinton quickly signed it.
Despite the havoc to the financial markets and damage to consumers the gut of the Act has created, Clinton still says that he has no regrets over signing the bill. The one regret that Clinton has in hindsight is that he didn’t push harder for tougher oversight of Fannie Mae and Freddie Mac and financial traders. Clinton’s regret rings hollow given that it was Congressional Democrats and Democratic mayors who clamored the loudest to relax the oversight rules under the guise of bumping up minority homeownership. And it was Rubin and other Clinton administration officials who pushed Congress to loosen the constraints on financial trading.
In 2005, Senate Democrats had another chance to reform Fannie Mae and Freddie Mac. The Senate Banking Committee passed a bill to give regulators the power to require companies to shed their investments in risky assets (the so-named government-sponsored enterprises GSE reform bill).
The bill never got to the Senate floor thanks to Democrats. They killed it in committee. Democrats continued to parrot the line that any limitations on the financial industry would hamper its ability to compete in the financial markets. This was only part of the reason Democrats flacked for the financial industry. The other part is the sway that industry lobbyists have over Congress through the gargantuan amounts of cash they dump into the campaign coffers of top Democrats. That includes Barack Obama, Hillary Clinton, and Banking Committee Chair and short lived Democratic presidential candidate Christopher Dodd.
Obama got more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac. Obama’s top presidential campaign contributors and bundlers read like a who’s who of Wall Street bigwigs. They have either directly contributed or bundled millions of dollars into his campaign.
Clinton ranks number 12 on the Fannie and Freddie PAC gift list. She has received more than $75,000 from the two enterprises and their employees.
Dodd grabbed the top spot on the list of Fannie and Freddie PAC campaign payouts. He has received more than $165,000. Yet, Dodd has screamed just as loud as Pelosi that the blame for the financial muddle lay exclusively with Bush and Republican bungled policies.

Dodd griped that the Bush Bailout scheme was too skimpy on details. That’s a sure sign that if, or when, the Bush plan gets to the Senate, Dodd and other Senate Democrats will back it. Why not? They’re no different than Bush and Congressional Republicans in giving Wall Street pretty much everything else it has wanted, Pelosi’s Republican saber rattle notwithstanding.

Earl Ofari Hutchinson is an author and political analyst. His new book is The Ethnic Presidency: How Race Decides the Race to the White House (Middle Passage Press, February 2008).