WASHINGTON – The complex instruments at the heart of the financial meltdown, and the way two giant companies were wrapped around them and entwined with each other, are being examined by the special panel investigating the origins of the economic crisis.
The Financial Crisis Inquiry Commission is turning its focus to derivatives at two days of hearings starting Wednesday. On the hot seat will be former executives of American International Group Inc., the insurance conglomerate saved from collapse by a $182 billion taxpayer bailout, and current officials of Goldman Sachs Group Inc., the finance powerhouse that has been one of Wall Street's biggest derivatives dealers.
Traded in an opaque global market valued at around $600 trillion, derivatives have caught a big part of the blame for the financial crisis that ignited in late 2008. The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
After the subprime mortgage bubble burst in 2007, derivatives called credit default swaps, which insured against default of securities tied to the mortgages, collapsed. That brought the downfall of Lehman Brothers and pushed AIG to the brink. New York-based AIG got an initial $85 billion infusion from the government in September 2008.
Goldman Sachs profited from its bets against the housing market before the crisis, and continued to ring up huge profits after accepting federal bailout money and other government subsidies. The firm's dealings in another type of derivative, known as collateralized debt obligations, have brought it harsh scrutiny by a Senate panel and in the case of one $2 billion CDO, civil fraud charges from the Securities and Exchange Commission.
A CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.
In early June, the congressionally chartered crisis inquiry panel issued a subpoena for documents from Goldman Sachs, accusing the firm of stonewalling its investigation. Goldman said it had cooperated.
The panel is looking at the relationship between the two financial giants.
"They had very substantial dealings with each other," commission chairman Phil Angelides said in a conference call with reporters Tuesday.
Much of the federal rescue money for AIG went to meet the company's obligations to its Wall Street trading partners on credit default swaps. The biggest beneficiary of the AIG money was Goldman, which received $12.9 billion.
Among the executives expected to testify: two former CEOs of AIG, Joseph Cassano and Martin Sullivan; and Gary Cohn, Goldman's president and chief operating officer.
When AIG posted a loss for the fourth quarter of 2007, it pinned the blame on an $11 billion writedown related to the credit default swaps held by its Financial Products unit. If AIG couldn't make good on its promise to pay off the contracts, regulators feared the consequences would pose a threat to the whole U.S. financial system.
Cassano left AIG in 2008, shortly after the $11 billion loss was reported.
He was interviewed by the inquiry panel staff for five hours.
"He was at the center of this," Angelides said Tuesday.
CARACAS (AFP) –
Venezuela's legislature has voted to nationalize 11 oil rigs owned by the US firm Helmerich & Payne.
The rigs, located in Monagas, Anzoategui and Zulia states, will be taken over by state oil giant Petroleos de Venezuela (PDVSA), the official news agency AVN said.
PDVSA had asked the legislature controlled by supporters of leftist President Hugo Chavez to take over the rigs after the US firm declined to negotiate a new service contract, unlike 32 other foreign firms.
The oil giant is South America's top oil producer.
Since 2007 Caracas has nationalized companies in industries from oil to utilities, to telecoms, cement, steel and banking.
NEW YORK (Reuters) –
Nearly one out of every three U.S. home sales in the first quarter was a foreclosure property as steep price discounts boosted demand for distressed real estate, RealtyTrac said in a new report on Wednesday.
Foreclosure homes accounted for 31 percent of all residential sales in the first quarter of 2010, with the average sales price of properties that sold while in some stage of foreclosure nearly 27 percent below homes that were not in the process, Irvine, California-based RealtyTrac said.
"In a normal market, only 1 to 2 percent of home sales are foreclosures, so this is certainly a significant level," Rick Sharga, senior vice president at RealtyTrac, said in an interview.
Total U.S. foreclosure sales in 2009 were up more than 1,100 percent from 2006 and more than 2,500 percent from 2005. Foreclosure sales accounted for 29 percent of all sales in 2009, up from 23 percent in 2008 and a mere 6 percent in 2007, the real estate data company said.
Foreclosure activity in the first quarter, however, ebbed from the previous quarter as well as year-over-year.
A total of 232,959 U.S. properties in some stage of foreclosure -- including mortgage default notices, scheduled for auction or bank-owned (REO) -- were sold to third parties in the first quarter, a decrease of 14 percent from the previous quarter and down 33 percent from the peak during the first quarter of 2009, when sales of foreclosure homes accounted for 37 percent of all residential sales.
"The drop from the previous quarter can probably be attribute to seasonality, and while the year-over-year drop is significant, it should be noted that it was down from the peak," Sharga said.
"A combination of an enormous inventory of distressed properties and an unprecedented interest by homebuyers to buy these properties boosted sales," he said.
The average sales prices on properties in some stage of foreclosure decreased 23 percent from 2006-09, while the average discounts on foreclosure purchases increased from 21 percent in 2006 to 27 percent in the first quarter of 2010.
The discounts on REOs are larger than those on pre-foreclosures, although discounts on pre-foreclosures appear to be trending higher as short sales become more common, the company said.
"First time homebuyers and investors continue to buy foreclosure properties in large numbers, and at substantial discounts," James Saccacio, Chief Executive Officer of RealtyTrac, said in a statement.
"As lenders have begun repossessing homes at record levels over the first half of 2010, it will be interesting to watch how they will manage the inventory levels of distressed properties on the market in order to prevent more dramatic price deterioration," he said.
Meanwhile, the Sun Belt continued to lead foreclosures nationally, with Nevada, California and Arizona posting the highest percentage of foreclosure sales in the first quarter.
Foreclosure sales accounted for 64 percent of all sales in Nevada in the first quarter -- the highest percentage of any state. The state's percentage was down from 65 percent of all sales in the previous quarter and 75 percent of overall sales in the first quarter of 2009.
California posted the second highest percentage for U.S. states, with foreclosure sales accounting for 51 percent of all sales there in the first quarter -- up from 50 percent in the previous quarter, but down from 70 percent of all sales in the first quarter of 2009.
Other states where foreclosure sales accounted for at least one-third of total sales were Massachusetts, Rhode Island, Florida, Michigan, Georgia, Illinois, Idaho and Oregon.
Foreclosures are by far one of the biggest threats to the U.S. housing market. Improvement in the housing market bodes well for the national economy, as it points to better demand in the sector where the first signs of the latest recession took root.