A better solution to the mortgage crisis, the federal governments bailout policies, and AIG’s failures to meet the obligations it took the risk of not meeting

I have several thoughts about the AIG bailout apart from what I consider the justifiable outrage over multi-million dollar bonuses being paid to the very people who set up the house of cards AIG had constructed.

First, I can’t understand why anyone would be surprised, much less outraged, that AIG paid much of the bailout money it received to other financial institutions.  Those institutions (Goldman Sachs, for example) owned mortgage backed securities and had purchased from AIG the “credit default swaps” that were, in essence, insurance that the owners of the mortgage backed securities would not earn from those securities what they were supposed to. Goldman Sachs had not received what they were owed on the mortgage backed securities because the crash in the housing market meant that homeowners were not making the mortgage payments that made up the pools of money out of which the owners of mortgage backed securities were to be paid.  Thus, when Goldman Sachs was not paid what it was supposed to be paid from the homeowners, Goldman Sachs turned to AIG and asked to be paid pursuant to the insurance policies it had purchased from AIG (that is, the credit default swaps).

AIG had never planned for such a shortfall in mortgage payments.  It had essentially sold the credit default swaps to earn easy money (the “premiums” for the sales) that it did not believe it would ever have to pay out on.  Thus, when in fact it did have to pay out on those credit default swaps, AIG was threatened with bankruptcy because its obligations to the owners of mortgage backed securities far exceeded its assets.

The U.S. could not afford to let that happen.  AIG is the world’s biggest insurer.  It’s failure would set off massive insecurity in every single aspect of life in which people and institutions depended on the availability of its insurance.  Neither could the U.S. afford to let the financial institutions fail.  That would mean a collapse of our banking system, an even greater and more profound impact on the functioning of our credit markets and other aspects of our economy — in short, a Depression on the order of The Depression.

Here’s what I don’t quite understand.  The underlying problem was that too many homeowners were unable to make their mortgage payments.  Why not readjust everyone’s mortgage payments (by, say, automatically cutting mortgage rates to the current low rates).  The owners of the mortgage backed securities would not make as much as they otherwise would have had the original rates been paid, but too many of the original rates weren’t paid to make enough of the mortgage backed securities assets with any material value.  The owners of the mortgage backed securities would make some of the money they had expected.  They would still be able to look to AIG under the credit default swaps for the difference between what they had expected to make under those securities and what they made under the readjusted, low rates, but AIG’s exposure would have been considerably lower — not the entire value of the mortage backed securities but, rather, the difference between what those securities earned under the new adjusted mortgage rates and what they originally were supposed to have been paid.  To the extent that obligation still threatened AIG’s existence, the government could make up the shortfall, but the amount of federal dollars required to do so would have been far less.

One objection, of course, is that we’d be rewarding those homeowners who took the risk of assuming mortgages they couldn’t afford.  The problem with that argument, of course, is that the owners of mortgage backed securities took the risk they wouldn’t get paid either through the securities from the pools of mortgage payments or from AIG, but we’re bailing them out.  And AIG, of course, took the risk in selling its credit default swaps that it would not be able to meet its obligations under them, but we’re bailing them out.  We’re doing so because we have to.

But we have to bail out the homeowners too.  The very existence and health of our cities depends on us doing so.  Why are the homeowners any more to be the victims of “moral hazards” than the financial institutions.

Everyone wins.  Homeowners stay in their homes at today’s mortgage rates.  The lenders don’t get what they contracted for, but they get what, given the circumstances we’re in, is a perfectly reasonable rate of return.  More importantly, the lenders don’t fail as a result of mortgage defaults and the insufficiency of foreclosure as a remedy to make up the loss resulting from the default.  The banks that own the mortgage backed securities are made whole (or almost so), and AIG is made whole (or almost s0).

Could anyone tell me what I’m missing here?  I do not claim to be an expert on these matters, but I am smart enough to follow the money and the trails of contract obligations, and I’m not quite sure where my logic fails.  I’m sure it must, but where?

Language abuse is posing an existential threat to those around me.

Perhaps it’s being reminded recently to re-read “Politics and the English Language.”  Perhaps it’s journalism’s daily abuse of our language.  Perhaps it’s the despair peculiar to mid-November of the first semester of law school, when students have realized they have learned a lot and, understandably, given the enormous effort they’ve made over the last three months to accomplish that learning, let up, forgetting what I’ve been telling them for those three months: it will be many, many years before they feel in their guts they’re really good at expressing themselves as lawyers and understanding other lawyers.  Perhaps it’s the letter a friend received from her mortgage lender making a sincere and pathetic effort to explain to a human being what it could do for her under the federal government’s recent “baiiout” plan.  Perhaps it’s reading of Malcolm Gladwell’s most recent best-selling insight — it takes 10,000 hours of practice for anyone to become really good at anything — and realizing that maybe it takes 10,000 hours of practice to become a really good legal writer.  Perhaps it’s realizing again, for the thousandth time, that lawyers really do often use their skill with language to obscure and deceive.

At any rate, I am suffering from the cynicism Orwell in that essay mentioned in the first sentence above argues against:

Most people who bother with the matter at all would admit that the English language is in a bad way, but it is generally assumed that we cannot by conscious action do anything about it. Our civilization is decadent and our language — so the argument runs — must inevitably share in the general collapse. It follows that any struggle against the abuse of language is a sentimental archaism, like preferring candles to electric light or hansom cabs to aeroplanes. Underneath this lies the half-conscious belief that language is a natural growth and not an instrument which we shape for our own purposes.

Can we at least agree on one thing?  Can we stop using the term “existential threat” to refer to a threat that poses a genuine risk of destroying someone or something’s very existence?  As in:

Iran poses an existential threat to Israel.

The Soviet Union during the Cold War posed an existential threat to the United States.

Islamofascism poses an existential threat to Western democratic capitalism.

The term “existential threat” hides the real question — how much of a threat? — behind the idea that if something poses a threat to one’s very existence it is as bad as a threat gets.

Maybe it’s just that I started writing this post at 4am, which I’ve heard is “the new midnight.”

Creative law “enforcement” in difficult times

From the Chicago Tribune:

“Approximately 70 foreclosure orders that will not be served are displayed at the Cook County Sheriff’s office on Wednesday.

“At least it was until Wednesday, when Sheriff Tom Dart announced he wouldn’t do it anymore.

“Dart cited the growing number of evictions that involve rent-paying tenants who suddenly learn their building is in foreclosure because the landlord neglected to pay the mortgage. By refusing to do any foreclosure-related evictions, the hope is that banks will change their policies.”

(hat tip to MInor Wisdom)