I think BIG ones do. This AIG debacle may just be the beginning, not the end. We are already hearing rumblings about WAMU. As a former mortgage broker, I can tell you that we sold a ton of option ARM loans to WAMU and World Savings (now Wachovia). I think these will be the worst part of this mortgage meltdown and I fear that the two biggest buyers of these loans may sink. I hope not. WAMU is the largest thrift in America and Wachovia is no slouch either.
In addition, Bank of America , which is not even the largest bank in America, just bought the largest mortgage servicer, Countrywide, and a top tiered investment house, Merrill Lynch. BofA must have its own troubled portfolio of non performing loans so how are they going to fare? I am not so confident.
The biggest problem that I see on the horizon is the insurance industry. AIG is in trouble because they bought mortgage loans, I suspect. I think much of the money that fueled this massive credit expansion and hence this mortgage meltdown came from big insurance companies. When I brokered loans, I usually did so to a bank, who then either sold it or kept it on their books. Mostly, it was the Option ARM (mostly neg-am) loans that the lenders like WAMU and Wahovia kept on their books. They were unique loans that weren't as easily sold in the secondary market, as I recall. The loans that were sold, were Fannie, Freddie and Alt-A loans. The biggest buyers were insurance companies behind Fannie and Freddie. If AIG is hurting, I can't imagine what other massive insurance companies are coming on deck. This is really scary.
I know that Fannie and Freddie repackaged these loans into investments and sold them. Whom do you think bought them? AIG, perhaps? And just look at all those stockholders in Fannie, Freddie, and AIG. Their stocks are practically worthless now. We are talking billions of dollars of retirement and personal wealth gone (to Uncle Sam). That sucks!
If the U.S. housing market is near $12 trillion, and we are forecast to drop to around $9-10 trillion, where does that $2-3 trillion go. Poof!, Gone. Usually money cannot disappear. It is only either made or lost. It is a zero sum gain in that someone wins and someone looses. In a stock, for instance, seller sells for $100, and the buyer resells for $90. Buyer lost $10, but seller made $10. It was just a transfer of money. In this case, no one gets the money. Borrower borrows $100k on a perceived value of a house and lender losses $30k when it gets foreclosed. Buyer looses all, lender looses $30k and new buyer probably will not see that $30k for many years to come, and only in its normal cycle.
My macro economic skills are weak, but we are seeing trillions of dollars disappear and that will have massive consequences for main street. This isn't just Wall St.
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