By Stuart A. Kallen
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Sample text
The economic problems that set off the recession in the United States quickly rippled through the world economy. Major banks failed in England and Germany because of their ties to Wall Street. In late 2007 Sachsen LB, the state bank of Saxony, Germany, nearly collapsed when the value plunged on the American mortgage-backed securities it had purchased. Several other state banks failed for similar reasons and all had to be rescued by the German government. Germany was one of the wealthiest countries in the world and was able to absorb the huge debts created by the mortgage meltdown.
53 Losing Trust In October 2009 European Union officials finally exposed Greece’s accounting and tax problems. The actual deficit was revealed to be over $400 billion, almost four times higher than previously stated. This 63 deficit was one of the highest in the world relative to the country’s gross domestic product. Greece was facing bankruptcy, but unlike Iceland, its problems threatened the entire European Union. Economist HansWerner Sinn explains: If Greece went bust, investors from all over the world could lose their trust in the stability of the weaker EU countries.
Eugene Park, one of the executives at Financial Products, began to question the wisdom of this business move. Park was worried that the housing market could crash in any part of the country at any time. He warned Cassano that AIG was too heavily invested in CDSs. The company soon stopped issuing swaps, but it was too late. Because of 36 AIG FP’s massive investment in CDSs, Standard & Poor’s downgraded AIG’s credit rating from AAA to AA. When a company’s credit rating is lowered, it has far-reaching consequences.