AIG (NYE: AIG) was the most respected insurance firm in the world when it was run by Hank Greenberg. But he is gone, along with the respect.

AIG managed to lose $7.8 billion in the last quarter, an impressive amount even by the standards of current bank and brokerage deficits. According to The Wall Street Journal, "The giant insurer also announced that it would raise $12.5 billion in capital to replenish its balance sheet."

Of course, the reason for the losses was, among other things, investment in instruments based on mortgages.

One odd piece of news that came out of the awful quarter from the insurance firm was that it would raise its dividend. It is hard to imagine where that cash will come from.

The smoke signal sent up by AIG is that the crisis involving US financial firms is not over. AIG did not say that the future was bright and the sun was coming out from behind dark clouds. Pessimism was the emotion of the day.

Watch for more big losses from banks and brokerage in the second quarter. AIG is a canary in a coal mine.

Douglas A. McIntyre is an editor at 247wallst.com.

Countrywide (NYSE:CFC) got called before Congress. All of the elected officials and their staff members wanted to know how the mortgage firm screwed up by lending people without the resources money to buy homes. Was there fraud involved? Did brokers inflate buyers' salaries? Did they take down any pertinent information at all?

As would be expected, Countrywide said it had not done anything illegal. All that happened was that its people made a few mistakes. All that has been fixed and everything is fine.

According to The Wall Street Journal, Countrywide "told a U.S. Senate Judiciary subcommittee Tuesday that the company is taking steps to address concerns that misconduct in bankruptcy proceedings by mortgage companies is exacerbating the nation's foreclosure crisis." In other words, the company gave out loans which people could not pay and then beat them up with fees which they could hardly afford when they got behind on payments.

The FBI and a number of other agencies looking into Countrywide's practices. They obviously are not willing to settle for the company's comments before Congress. These investigators think that the mortgage operation knew a great deal about what it was doing and was doing it on purpose to make more money.

Countrywide can testify all it wants. There is no poll of home buyers, federal investigators. or Congressmen that will show anything other than the belief that the company is not telling the truth. Not even close.

Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 letter.

The New York Times reports that Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) have a tiny sliver of capital to support a mountain of mortgages. To put it in perspective, their level of borrowing is almost twice that of the enormously over-leveraged investment banking and hedge fund industries. With the collapse of the housing market, Freddie and Fannie are in trouble. And when you get to the scale of these two, so is America.

As I posted last month, it could cost $1 trillion to bail out Fannie and Freddie. These hybrid organizations are a key cog in the mortgage industrial complex (MIC) that has gotten the world into its current capital crisis. Fannie and Freddie buy "conforming" mortgages from their originators and then package and sell the mortgages as securities. But these two have a mere $83 billion in capital to support $5 trillion worth of debt and other commitments.

This 60-to-1 ratio is almost twice the 32-to-1 ratio of the highly leverage investment banks and hedge funds. And like any company with hard-to-value assets, Fannie and Freddie have unrealized losses. In their case, those total $20 billion -- they've already taken $9 billion worth so far this year. By 2007 they had guaranteed or invested in $717 billion of subprime and Alt-A loans, up from almost none in 2000. And many of those are not worth that much.

AP reports that Countrywide Financial Corp (NYSE: CFC) lost $893 million in the first quarter. That $1.60 a share loss was not exactly what analysts had forecast -- they were looking for a profit of two cents a share.

Meanwhile the LA Times reports that Countrywide CEO Angelo Mozilo took in $10.8 million and cashed out $121.5 million in stock gains as his company got hammered by losses on sub-prime loans in 2007. Mozilo also enjoyed perks worth $176,513, including $44,454 in rides on the company's jet; $23,755 in automobile use; $8,581 in country club dues; and $31,238 in company-paid tax and investment advice. Mozilo faces an informal U.S. inquiry into his stock sales.

And Countrywide's financial condition is deteriorating fast. It set aside a $1.5 billion reserve to cover loan up 62% from $925 million in the fourth quarter of 2007. Moreover charge-offs totaled $606 million during the first quarter. Fortunately, Countrywide has an exit strategy. In January, Countrywide agreed to sell itself to Bank of America (NYSE: BAC) for about $4 billion in stock. The question is whether Bank of America will pull out of the deal now that it sees the rising costs it will incur if it moves forward. Since Countrywide trades 15% below that takeout price, the market has its doubts.

Investors don't seem happy with today's announcement -- the stock was down 5% in premarket trading.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

The FBI says that deceptive practices at hedge funds and some banks may have made the subprime disaster worse. According to Reuters, the head of the agency said the bureau's investigation of potential fraud in the U.S. home mortgage industry now encompasses 19 companies in "cases that may have a substantial impact on the marketplace."

While insider trading and accounting fraud may be part of any charges which emerge, one of the biggest single issues may be the sales practices of the firms which sold subprime paper to their clients. The subprime instruments were often presented as having high credit ratings and safe risk profiles. Of course, it didn't work out that way. Another problem may be whether mortgage banks were completely honest in what they told home-buyers about how their loans would work as their interest rates increased over time.

Some of the investigation is a witch hunt. Large banks which took subprime instruments onto their balance sheets had plenty of genius-level analysts who could have examined the products. At most firms, so one skipped that part. Caveat emptor and all that. Individuals who took on home mortgages sold by people who did not want them to read the small print is another matter.

Rumors are that Goldman Sachs (NYSE:GS) and and Morgan Stanley (NYSE:MS) could be targets of the probe. Countrywide (NYSE:CFC) is already under investigation. One news report on the potential scandal said that FBI head man Robert Mueller told a meeting of lawyers "that their corporate clients should come forward and admit any wrongdoing before the FBI or Justice Department become involved.."

That'll be the day.

Douglas A. McIntyre is an editor at 247wallst.com.

Econobrowser suggests that housing prices could drop 50% from their peak. While it was initially skeptical about such a huge drop which was suggested by a commenter, its re-examination of this based on recent developments, and what the economists surveyed by the Wall Street Journal say led it to conclude that such a summit plummet was plausible.

Sunday, I posted on the possibility that it could take 10 years for housing prices to recover based on an interview with the Warren Group and comparing the current housing tumble to the one in the 1990s. Combining this with the Econobrowser's pessimistic scenario suggests that we could be in the longest and deepest housing price decline in American history.

I do not understand the details of the analysis presented here but if my reading of the post is correct, it concludes that the Case-Shiller index of housing prices, one which seems to have more credibility than the one produced by the government's OFHEO (Office of Federal Housing Enterprise Oversight) House Price Index (HPI), is that prices could fall 50%. Econobrower notes "that only a slightly more pessimistic than average forecast implies a 50% decline in house prices as measured by Case-Shiller, relative to peak."

So if you bought a house for $300,000 in 2006, it could be worth $150,000 when the housing market hits bottom and take until 2016 to recover to its original price. How about that for an ownership society?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Alphonso Jackson resigned today as Secretary of Housing and Urban Development, becoming the latest Bush administration official to leave under a cloud. No word on a replacement.

Jackson, who most Americans couldn't name in a bar bet, is under investigation by the FBI. He allegedly helped a friend who was paid $392,000 by HUD in New Orleans after Hurricane Katrina and allegedly punished the Philadelphia Housing Authority (PHA) for nixing a deal with another friend, the record producer/developer Kenny Gamble, according to The Associated Press. The PHA filed a lawsuit.

"At a congressional hearing this month, Jackson repeatedly refused to answer questions about the Philadelphia redevelopment deal," the story said. "Last year, the inspector general at Jackson's department found what it called 'some problematic instances' involving HUD contracts and grants, including Jackson's opposition to money for a contractor whose executives donated exclusively to Democratic candidates."

The Fed has opened itself up to take some fairly weak securities from banks in exchange for funding to keep them liquid. According to Reuters: "The U.S. Federal Reserve is taking a risk by opening up its own balance sheet to the same poisonous securities that have strained banks to the limit."

The agency may feel it has little choice other than to swap good money for bad securities. The problem is that, if it does not, some large financial institutions could fail. The Fed can wait to see if the value of the securities increase over time as some subprime mortgages are paid off and locked up credit markets start to trade again. But, to think that the investments will ever be worth $1 for $1 that the Fed lends out is highly unlikely.

That means that the government has gone all the way to bailing out these companies and that tax-payers will foot the bill for tens of billions of dollars of "losses" at the Fed.

But, even if the tax-payer is asked whether he would like to pay a few more dollars to help big financial institutions stay in business or lose his job in a huge recession, he is likely to vote for paying the extra money.

Douglas A. McIntyre is an editor at 247wallst.com.

Investors will want to read the brief interview with Charles Schwab Corporation (NASDAQ: SCHW) CFO Joseph Martinetto in the March issue of CFO Magazine. Thanks in large measure to Joseph Martinetto and his predecessor, Schwab has not been battered much by the subprime mortgage mess. Despite being chided in The Wall Street Journal (subscription required) and other financial newspapers, Schwab passed on investing in subprime products. It is refreshing to read about a CFO who states up front that subprime products do not meet the risk/return profile Schwab needs in order to act on behalf of their clients, therefore Schwab has no intention of investing regardless of public mockery. Who's laughing now?

For FY 2007, Schwab stock price is up 32%, income from continuing operations in up 26%, and total client assets under management are up 17% to $1.4 trillion. A measurable chunk of those increases comes from new client business from investors burned by other financial services companies that seem to have forgotten how to price risk appropriately. Martinetto states that Schwab processes about $1 billion in securitites transactions daily, so there is enough operating risk in the business without seeking out additional financial risk. According to Martinetto, the US economy is in for another 4-6 quarters of uncertainty due to the fallout from the housing market slump and credit crunch. Schwab stock currently trades under $19 and may provide a suitable investment for more conservative investors seeking a measure of stability.

Citigroup (NYSE: C) is going to make share cuts in it mortgage loan business. That may make the market for getting home loans harder as one of the major sources for buyers moves away from lending.

According to The Wall Street Journal, "The bank said it plans to reduce its $200 billion portfolio of mortgage loans by about 20% over the next year and afterward will focus its underwriting on loans that can be sold on to other investors." Closing lending offices will also save the company money.

As Citibank and other banks cut their lending into the home-buying markets, the standards for getting mortgages will certainly go up. So could interest rates as banks ask of higher payments to offset potential risk.

By putting in their home-lending horns, banks may make a recession much deeper. The housing market cannot recover without buyers. Banks are making it harder for buyers to finance purchases.

While the Fed is providing more capital to banks at lower rates. those benefits are not being passed on to the consumer. Treasure and the Fed are going to have to come up with a program that actually encourages banks to take the "cheap" money they are getting and lend it into the markets.

Otherwise, the housing mess could get much worse.

Douglas A. McIntyre is an editor at 247wallst.com.

Reuters reports that U.S. home prices fell a record 8.9% in 2007. The last time home prices fell anywhere near as much as in 1991 when they lost 2.8% of their value. That was when the current president's father was in office. And he presided over a $200 billion government bailout of the savings and loan industry.

This is an impressive accomplishment for junior. But it does not appear to be the end -- although it may mark the beginning of the end. That's because, as you may have read by now, two million homeowners are expected to foreclose on their homes by the end of 2009. The reason is that variable rate mortgages are resetting to rates higher than many borrowers can afford.

It's too early to tell how much the current president's housing market problems will cost the economy. Although, so far, he is doing a good job of keeping the government from formally bailing out the housing market. That is unless you take into account the skyrocketing stagflation resulting from the Fed's interest rate cuts and the credit crunch.

Maybe the U.S. needs a break from Bushes in power.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

With media outlets and politicians heaping sympathy on subprime borrowers on the brink of losing everything, it's important to keep in mind the real victims on this mess: that's right, the mortgage brokers who got us into it.

As if plummeting earnings from the decline in subprime lending weren't bad enough, subprime write down poster child Countrywide Financial (NYSE: CFC) canceled its annual ski party at the Rittz-Carlton Bachelor Gulch in Avon, Colorado, where the company puts up 30 of its most valued correspondent lenders (at $725+ per night) and treats them to skiing and $140 caviar and Kurobuta pork osso bucco at Wolfgang Puck's restaurant.

It looks like this year the closest they'll be getting to Spago is the Wolfgang Puck canned dumpling soup available for $31.20 per 12-pack on Amazon.com. Even that might be a stretch in this market. But there's always Chef Boyardee.

Former Merrill Lynch & Co. (NYSE: MER) Chief Executive Stan O'Neal, former Citigroup Inc. (NYSE: C) CEO Chuck Prince and former Countrywide Financial Corp. (NYSE: CFC) Angelo Moziilo are due to testify before the U.S. Congress next week about executive pay. No, ladies and gentlemen, I am not making this up.

The poster children of outrageous executive compensation will appear Thursday before the House Committee on Oversight and Reform, which recently delved into the touchy issue of whether Roger Clemens had performance-enhancing drugs injected into his rear end. The three should have plenty to talk about as CNN/Money.com notes.

Upon his departure from Citigroup in November, Prince left with approximately $68 million, while O'Neal collected about $161 million after he stepped down in October.

Countrywide's Mozilo reportedly stood to collect a windfall of $115 million dollars after his firm agreed in January to a yet-to-be completed $4 billion sale to Bank of America. But after facing heavy criticism from lawmakers, Mozilo said he would forfeit $37.5 million in payments tied to the deal.

This should be a doozy. Committee Chairman Henry Waxman (D-CA), who has taken on numerous special interest groups including Big Tobacco, will have his hands full as his committee examines the link between executive pay and the mortgage crisis. He better have an extra-large gavel handy because these witnesses didn't think they were accountable to shareholders and sure don't think they need to explain themselves to a bunch of politicians.

With this morning's market rising in spite of news of Credit Suisse (NYSE: CS)'s $2.8 billion write-down and the potential for $203 billion worth of additional Wall Street write-downs on various "structured investments", I began to wonder whether investors have already discounted all the bad news and the market will start to rise.

The Credit Suisse write-downs drew praise from analysts for their reflection of the strength of its risk management but they also shocked investors who sliced 9% of its stock. Credit Suisse took "fair-value" reductions -- an estimated price when no market price is readily available -- of its "structured credit trading positions" of about $2.85 billion. I am not sure why analysts praised Credit Suisse because it's not all that different from any firm struggling with how to value illiquid securities.

Meanwhile, UBS estimated that the world's largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles (SIVs), leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail -- and this assumption will soon be tested.

Alan Greenspan is obtuse no longer.

The former Federal Reserve Chairman, whose incomprehensible musings were parsed by investors for years to find their hidden meanings, startled markets again by telling an audience willing to pay his hefty speaking fee that the economy is "clearly on the edge of a recession." His remarks underscore those of his successor Ben Bernanke, who has argued the economy is slowing because of the meltdown in the subprime mortgage market.

From the Associated Press:

"If it weren't for the fact that business was in such extraordinary good shape before this problem hit, I don't think we'd be questioning at this stage whether we're in a recession," Greenspan said during a question-and-answer session with Daniel Yergin, chairman of Cambridge Energy Research Associates, the Massachusetts-based consultancy that sponsored the dinner.

"We'd be talking about how long and how deep," he said. "And we're not there yet."

But we're awfully close, no?

Freelance writer Jonathan Berr edits the blog Ketchup and Eggs.