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Henry Paulson
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February 2008 closed with a flurry of write-downs from major financial institutions – and there is little sign that the US government will step in to help investors but will focus its resources to alleviate borrowers’ problems.
American International Group (AIG) joined the ranks of the big losers last week when it announced it was writing off nearly $15bn, much of it related to insurance policies written to protect investors in CDOs from their failure to pay. AIG has $78bn of credit default swaps on CDOs outstanding and a company statement said that there could be additional losses. $3.3bn of the write off also came from mortgage-backed securities in AIG’s own investment portfolio.
In the same week, Royal Bank of Scotland announced it would write down $5.7bn in mortgage related assets comprising debt securities linked to the US sub-prime mortgage market and loans to private equity groups, including assets held by its acquisition, ABM AMRO. $1bn of this write down is a provision against perceived problems in the sub-prime bond insurer markets, a concern that was also mentioned by Canadian Imperial Bank of Commerce (CIBC) in its own write down of $1.5bn.
DZ Bank, Germany’s fifth largest back announced a write down of $2bn and Peloton Partners, previously one of London’s most successful hedge funds, announced that it was putting the assets of its $2bn ABS fund up for sale as it was unable to meet its lending commitments. Last month, ABS had been named best new fixed-income fund after making large profits by betting against mortgage-backed investments.
In Washington, Henry Paulson, US Treasury Secretary, sought to raise the gloom by assuring an audience that 93% of the US mortgage market was in good shape and only 2% were in default. The US government was focussing its attention of the 5% in trouble with payments. Paulson said, "So while some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good. I'm not interested in bailing out investors, lenders and speculators. I'm focused on solutions targeted at struggling homeowners who want to keep their homes."
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