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Dear Mr. Berko:

Dear G.S.:

Few people realize the importance of the insurance industry to the mortgage market and why the Federal Reserve Board had to step up to the plate and “billionize” American International Group Inc. If the Fed hadn’t acted to shore up AIG, our entire financial system would have collapsed like a house of cards in a hurricane. The ensuing economic devastation would have frozen the world into an economic ice age.

The genesis of this crisis began with the implementations of the 1968 Fair Housing Act, which was designed to protect Americans from discrimination in mortgage lending practices based upon race, religion and national origin. It gained momentum a dozen years ago with liberal interpretations of the Equal Credit Opportunity Act that fostered rampant abuse and greed.

Soon, Lehman Bros., Merrill Lynch, Bear Stearns and others were subsuming the mortgage markets, creating hundreds of billions of dollars of collateralized debt obligations (CDOs). These bonds are backed by pools of mortgages that should never have been issued because their creditworthiness and underlying collateral are virtually nonexistent.

So Lehman Bros., Merrill Lynch, etc., in order to protect themselves against almost certain future default, purchased insurance contracts called credit default swaps from companies like AIG. Though the extent of credit default swaps issued by other insurers is unclear, we do know that AIG insures more than $500 billion worth of credit default swaps, which includes an estimated $70 billion to $80 billion worth of subprime mortgages.

When the housing bubble popped, all of those CDOs started to nose-dive in value. Because AIG did not have the cash to pay off its credit default swaps, the Fed was forced into action because the banking system would have collapsed under a new fusillade of losses.

Those losses are not confined to the United States. The British were lured by the hubris of Wall Street. Italy, Spain and France are similarly affected but to a much lesser degree.

While the subprime-collateralized debt obligation contagion spread, the housing market continued to deteriorate. Many home loans once considered less risky began to implode. Normally, 2 percent of “ALT-A” loans – loans to folks with good credit but no proof of income – are troubled. Today, that number is reaching 20 percent. Delinquent subprime loans that historically average a 9 percent rate of default are now 30 percent.

Because many midsize banks were tantalized to the trough, the trickle-down from Wall Street has bloodied Main Street. The midsize banks issued new preferred stocks, collected cash from investors and bought high-yielding CDOs. Those preferred stocks are beginning to collapse, resulting in so many good people on Main Street being ravaged by the greedy people on Wall Street.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service