A year after the government's seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It's easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs -- or worse, CDO squareds -- became so incredibly popular in the first place.

Yet, after all the damage, the trillions of dollars lost and the biggest state intervention in financial markets since the Depression, there has been no movement to ban their creation.

Securitization in its broadest form -- taking underlying collateral, bundling it together and selling it as tradable debt -- is still hailed as an important 20th-century invention that has helped worthy borrowers get the credit they need to buy a home, car, or education that would otherwise be out of their reach.

Policymakers, understandably, are anxious to get it started again after the market snapped shut last year. Wall Street, and investors taking advantage of generous financing from the Federal Reserve, are happy enough to oblige.

And it has worked. As of last week, new bonds backed by consumer debt reached $100.5 billion for the year, according to Barclays Capital. While a fraction of the pre-crisis market, that deal volume represents a healthy revival of a near-dead business. Three-quarters of the new deals are eligible for Fed financing.

The problem is phase II -- when these securities are then repackaged into something else. At the margins, it's already under way. Banks are repackaging problematic bonds backed by residential mortgages and the current disaster zone, commercial real estate loans, so they can slice off a new piece that can be resold with better protection.

The amounts are still small, but it's a reminder of the temptation to shift around a problem asset so investors can feel better about risk.

Although securitization has been around for more than 30 years, the housing and credit boom combined with the computing power of the 21st century gave rise to the proliferation of these repackaged goods filled with bad home loans.

Home loans, though, were just the most bountiful fodder to be found. The next go-around could involve using, say, bonds backed by life insurance policies -- the resurfacing fad among Wall Street banks -- as the building blocks for a new product.

In the name of simplicity and transparency, the repackaging of securities should just be banned, as I've argued before. This will ensure that junky debt doesn't get cut into so many pieces that understaffed regulators, rating agencies, investors and bank executives lose track of just who is left holding the bag should things head south.

Much of the public outcry and regulatory fervor has been focused on the banks and their reluctance to give up big bonuses for a job well done, or done badly as the case may be.

This is understandable, given the hardship banks and their creations have caused, but this won't necessarily prevent creative innovation from running amok.

Keeping banks from creating new products out of old ones will go a long way to make sure we're not right back where we started when the next crisis unfolds.

The Year Since Lehman -- related columns:

A year after Lehman, the good news

Banking? Keep it simple, stupid

A year on, it's still a housing story

It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.

Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.

And in the short term, Benmosche's vacation strategy appears to be paying dividends.

This week, AIG's shares surged 44 percent, to nearly $50, after Benmosche said that he intended to move slower than his predecessor in selling off AIG's still viable divisions.

Maybe Benmosche should consider relocating AIG's headquarters to Dubrovnik.

But the big run-up in AIG shares is merely a sideshow for momentum players, speculators and Hank Greenberg, the former AIG chieftain who controls about 11 percent of the company's outstanding shares.

The reality is that AIG exists today only because of the $180 billion lifeline the insurer has received from the federal government. Even Benmosche acknowledges that, telling The Wall Street Journal: "If the U.S. government doesn't continue to support AIG, we will fail."

The trouble is that the government continues to act as if its support of AIG is unconditional, which is why Benmosche can feel free to set his own leisurely timetable for selling AIG's assets. The former MetLife chief executive knows no one from the government is about to tell him what to do, even though American taxpayers effectively own 80 percent of the company.

But Treasury and the Federal Reserve need to be taking their cue from the Federal Deposit Insurance Corp in how to handle AIG.

Behind the scenes, Sheila Bair, the FDIC chairman, has been exerting a lot of pressure on her agency's biggest ward--Citigroup--to make changes to its management and business strategies. Treasury and the Fed should do much the same with AIG.

There's no reason for the federal government to be acting as a mere bystander in all this. After all, the government bailed out AIG chiefly to prevent a run on U.S. and European banks that had purchased hundreds of billions of dollars in guarantees on risky securities. In those scary days immediately following Lehman Brothers' collapse, AIG was too big to fail.

But nearly a year later, that is no longer the case. If AIG were to fail now it would be painful but more manageable because of the steps the Fed has taken either to guarantee or remove the most troubling assets from its balance sheet.

Yet the government's kowtowing to AIG leaves some scratching their heads.

"The controlling party here should be the government," says Brad Golding, a hedge fund manager with Christofferson, Robb & Co, who frequently shorts financial stocks, including shares of AIG in the past. "When he was made CEO, (government officials) should have called him and said: 'You are occupying this role at our whim.'"

There's talk about the Obama administration using the one-year anniversary of the demise of Lehman Brothers to give new life to its flagging financial regulatory reform package.

That's a fine idea and one that's no doubt necessary in light of the way many on Wall Street are returning to business as usual.

But here's something else Team Obama should do: Use the anniversary of the AIG bailout to set a hard-and-fast deadline for dismantling the insurer and getting the taxpayers' money back.

Don't blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it's only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That's because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets -- meaning today's worries about the global economy are likely to morph into tomorrow's worries about too much stimulus creating dangerous asset bubbles.

It's a constant tension and one that will continue to push and pull financial markets for some time to come.

"The markets have very selectively reacted to economic data," says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported "only" 247,000 workers were dropped from payrolls in July.

Given the big run up in risky assets like stocks and corporate debt since March, and last week's data, it's not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that's looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

So much for more transparency in the financial system.

It's hard for regulators to demand greater transparency from Wall Street banks when they can't even live up to their own standard of greater disclosure. A case in point is the Treasury Department's press release touting its decision to permit "10 of the largest U.S. financial institutions" to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn't name any of the banks that can begin repaying money to the Troubled Asset Relief Program.

Treasury, it appears, has left it up to each of the "10 of the largest U.S. financial institutions" to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn't waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money.

Now it's not like this list of banks is any big secret. For weeks now, it's been well-known that Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon--to name a few--were itching to repay the bailout money.

But this is a question of government accountability. If Treasury has made a decision to allow banks to repay TARP, it should tell us which banks it has given the all clear to. Why should it be left up to the banks to tell us? After all, isn't it the taxpayers' money that's being passed around here.

Nor should Treasury officials pass on the names of the banks in so-called "background'' sessions with favorite reporters. The best government is one that is run in the open--not in some closed-door Washington, D.C. conference room.

This refusal on Treasury to do something as simple as print the names of the "10 of the largest U.S. financial institutions" is similar to the same kind of arrogance the NY Fed displayed during the early days of the goverment's bailout of American International Group. The NY Fed, if you recall, refused to provide a list of the banks it was buying rotting CDOs from, in order to retire some $70 billion in credit default swaps that AIG had written on those securities backed by subprime mortgages.

At the time, the NY Fed claimed if it divulged the names of the banks selling CDOs to a Fed-sponsored entity called Maiden Lane III, the financial firms might be wary of doing business with the government. That argument sounded like a bunch of  rubbish back then because the arrangement was beneficial to both the banks and AIG.

But wait a minute. Who was the president of the NY Fed when Maiden Lane III was put together. That's right Tim Geithner, the man who now runs Treasury.

It's hard to see how Geithner will have the courage to really reform the financial system when he still too willing to play footsie with Wall Street bankers and can't even do what he preaches on the need for transparency.

– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

The revolving doors are spinning ever faster in the executive suites of corporations.

CEO turnover has reached an all-time high, according to figures kept by recruiting firm Challenger & Gray. Last year, 1,484 U.S. CEOs resigned, stepped down or were fired — six casualties every business day.

Resignation has outpaced retirement as the leading reason for departure, as the credit crunch has dealt a savage blow to prospects for growth and investors grow restive over share dilution, dividend cuts and shrinking outlooks.

High profile departures stretch from the bosses of the global retailer, Carrefour, to computer maker Lenovo to a succession of financial leaders including those at AIG, Merrill and UBS.

Turnover among top executives may even be accelerating as we descend into 2009. Similar defections appear to be occurring around the world, although no one keeps track of exact totals.

Given the public’s newfound lust for revenge against the CEO class, this exodus may provoke little more than a wry smile among anyone struggling to fend off the effects of the credit crunch in their own lives.

But it presents a practical problem for those boards of directors left to pick up the pieces after a CEO departs with his reputation and strategy in ruins: Where to find the talent and experience to step in and shore things up as well as start to build towards the recovery?

Executive recruiter Heidrick & Struggles has come up with one idea to solve the brain drain. It has lined up hundreds of executives across industries and functions for what amounts to an executive temporary service.

Think Manpower or Kelly Girl, only for former captains of industry — CEOs, CFOs, chief marketing, human resources and information officers. The idea is to place these individuals with companies needing short-term leaders — either to solve a crisis or seize a new business opportunity.

Many of the executives taking part in the Heidrick & Struggles’ Chief Advisor Network have left high-powered positions and are no longer interested in full-time work. But, like many in their baby boomer demographic facing the prospect of retirement, they are unwilling to completely disengage from work.

Executive temping is a natural extension of Heidrick & Struggle’s established executive search and leadership advisory businesses. Tapping the experience and talents of executives with a solid track record of corporate leadership makes sense to fill obvious leadership voids. The idea of bringing back a wise old head, perhaps one that can even remember the last recession, after a disastrous few years under a whiz-kid CEO probably appeals to many shaken boards.

But while the approach may offer a quick fix to companies in deep crisis — and there are plenty of those around right now — it’s not clear that it is the way forward in other situations. And there are even questions about how effective that fix might prove. Bringing in an outsider with no deep knowledge of a company can be a recipe for chaos — especially when things are in flux.

There’s also the risk of bringing in someone who is motivated principally by financial incentives and won’t stay around to see how their decisions pan out over the long term. Wasn’t short-term decision making by managers and directors often what tripped up these companies in the first place?

Lastly, the ability to rely on a temping service may even encourage boards not to take hard decisions on management succession, figuring they can plug the gap if they need to.

Leadership is vital in the wake of an important executive’s departure. But dialing up a CEO is symptomatic of the wider breakdown in corporate governance that has occurred over the past decade. If the practice becomes widespread, such short-term solutions are likely to breed further disillusionment with corporate management.

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. The opinions expressed are his own. –

By Peter Morici

The Treasury is injecting another $27 billion into AIG and raising the taxpayers’ investment to $150 billion. Secretary Paulson appears more intent on helping his pals on Wall Street than protecting taxpayer interests.

AIG has solid businesses in industrial, commercial and life insurance, but like a lot of financial firms, was attracted to easy profits writing credit default swaps on mortgage backed bonds—so called collateralized debt obligations (CDOs).

AIG received fees to guarantee repayment of those mortgages, or the funds obtained through foreclosures when homeowners defaulted. Like most on Wall Street, AIG executives believed home prices would rise faster than household incomes forever, so these CDOs really bore little risk.

This credit default swap business was outside AIG’s highly-regulated, solid insurance businesses but was backed by the value of those businesses. Essentially, if the CDOs fell too much in value, AIG pledged the value of those businesses.

If an abnormal number of the mortgages failed, the held to maturity value of the CDOs would fall, and obligations would trigger for AIG to post collateral. When that happened in 2007, AIG deposited cash or other liquid assets with the investors holding the CDOs. With the housing market so depressed by the summer of 2007, AIG could not raise enough cash to meet all its obligations.

On September 16, the Federal Reserve provided $85 billion in loans to AIG in exchange for warrants—the right to buy common stock—equal to 79.9 percent of the company.

AIG was to pay 8.5 percent above Libor for the first $85 billion. AIG was to use the loans to honor obligations to holders of the credit default swaps, and AIG was to sell parts of its insurance businesses to repay the loans to the Federal Reserve. That loan proved inadequate, and the Fed advanced another $38 billion on October 9.

The $123 billion was not enough to finance AIG’s short-term credit default swap obligations, and it cannot sell enough pieces of its good insurance businesses to pay back the Federal Reserve in the current environment.

Now, the Federal Reserve and Treasury are agreeing to restructure $60 billion of the original loan, lowering the interest rate to 3 percent above Libor and invest about another $27 billion AIG.

The interest rates on the loans were lowered, in part, because large shareholders complained about heavy handed government action.

The monies will be used to set up two special funds. The first will seek to buy up some of the CDOs that have declined in value for about 50 cents on the dollar, permitting AIG to recoup its collateral paid in cash. This fund will not buy up the most troubled CDOs, whose values are even lower than 50 cents on the dollar.

The second fund will be used to solve liquidity problems at AIG’s securities lending business. It rents securities to short sellers in the stock markets.

This is all folly.

The government assumes greater risks without getting benefits for the taxpayer. Many firms who purchased the original credit default swaps from AIG have used the collateral posted by AIG on the less risky CDOs for other purposes and may not want to sell AIG their CDOs. Also, many of the swaps have been resold to firms that don’t hold the CDOs, as part of complex derivatives transactions.

The short selling business is a whole new headache, and it should make taxpayers ask, what else is lying around at AIG.

If the deal works out, AIG executives get to keep their jobs; but if the plan fails, the U.S. government may get stuck holding the bag on billions of dollars of false promises to pay from AIG. Its warrants may prove not worth very much as AIG’s obligations overwhelm the value of its businesses.

If AIG can’t make it on the money the taxpayers have already apparently squandered, then the Treasury should simply exercise its warrants, take control of AIG, and sell off AIG’s solid insurance businesses for what they are worth. The Treasury can buy back the CDOs for common shares in the company and reorganize the new AIG with more responsible management.

The executives at AIG certainly have not behaved well since the first bailout. They have enjoyed lavish golf retreats in California and luxurious hunting trips in Britain.

While Americans make monthly tax payment to Washington, AIG executives hunt quail on the English countryside.