AIG "bailout"

[johnhpus]

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

I wonder where the Fed will get that money... oh wait, now I remember, they'll get the money by devaluing the money we (the citizens) have.

I just love secret, sneaky taxes levied by private companies.

[xavier]

It's not a lot of fun, no doubt. However, the alternative is to let these assholes drag the economy completely under with them.

Sad thing is, I distinctly recall, mere days ago, the Fed saying flat out that it was not bailing out anyone else.

I'm waiting for the Chinese to pull margin calls on their US debt holdings right now...lucky for us, they need a huge consumer to buy their products, so it's in their best interests to make sure we stay afloat.

BTW, the cash will come from China, and I'm guessing the theory is that it's AIG's job to pay it back.

Nothing like the bursting of a speculative bubble, is there? Everyone (including all of these financials that played risky business on mortgage speculation) thought the housing market would continue to soar and soar...

I look at it as chickens coming home to roost, and also a fanTAStic buying opportunity in the stock market right now -- so many perfectly viable and fundamentally sound companies (not talking the gutter-level financials that are all begging for bailouts right now, I mean the actual companies that do actual business and actually make things) are getting hammered in a "guilt by association" knee-jerk panic selloff...pick em up now, is my suggestion, because once the election's over and with it the uncertainty, you won't see these prices again for a long time.

[johnhpus]

My knowledge of economics is very limited, so I guess I might not appreciate the consequences of letting AIG fail. Would it have been more on the order of the 1980s or 1930s?

How is it that the money will come from China and not from the average citizen (barring any Chinese ownership in AIG)? I understand that they own an incredible amount of US dollars. Is that the point, or is there something else? (not sarcasm, I really don't know, but I would like to understand)

This whole "government money fairy" trend seems awfully screwed up from my limited vantage point. Is there some assurance from the government that this isn't going to continue? Will it?

It seems like if people make bad decisions when borrowing, or lending, or investing, that's mostly the risk of doing business. I don't want to see anyone out on the street, but short of that, these people should pretty much be on their own. Won't propping up failed business deals only contribute to whatever recklessness allowed them to begin with?

[KevinMulder]

How is it that the money will come from China and not from the average citizen (barring any Chinese ownership in AIG)? I understand that they own an incredible amount of US dollars. Is that the point, or is there something else? (not sarcasm, I really don't know, but I would like to understand)

Since there is not that much liquid money in the hands of the US citizen. For China it is a win situation, since by providing financial fundamentals they can ease the stock market fallback in China and in the same time they buy more strong position against USA. (USA will never consider Tibet nor Taiwan as a free state/country or China would withdraw this money letting USA fall down hardly) (I hate to say, I was right in my previous post )

It seems like if people make bad decisions when borrowing, or lending, or investing, that's mostly the risk of doing business. I don't want to see anyone out on the street, but short of that, these people should pretty much be on their own. Won't propping up failed business deals only contribute to whatever recklessness allowed them to begin with?

In a normal financial environment the state/federal should be in the position of allow or deny certain types of financial manoveurs. They should control what can and what can not be done. They have to raise the flag is something is out of control.

The problem is that they did not do that.

[Zool]

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

Whoa, that's some "corporate socialism" right there. Well, at least it's working for China..

It's very funny watching the free market advocates come crying to papa-government for help.
A loose free market catastrophic for the economy in the long run ? What a shocker...

[xavier]

My knowledge of economics is very limited, so I guess I might not appreciate the consequences of letting AIG fail. Would it have been more on the order of the 1980s or 1930s?

How is it that the money will come from China and not from the average citizen (barring any Chinese ownership in AIG)? I understand that they own an incredible amount of US dollars. Is that the point, or is there something else? (not sarcasm, I really don't know, but I would like to understand)

Things like the tax "rebates" we keep getting for no reason, and the cost of the war in Iraq, are not paid for by some magical bottomless well in Washington -- they are paid for by the sale of bonds to whoever will buy them. Most of the time those bonds are bought by foreign investors, and in most cases that means China and the OPEC nations (the ones with tons of disposable national income right now).

This whole "government money fairy" trend seems awfully screwed up from my limited vantage point. Is there some assurance from the government that this isn't going to continue? Will it?

We can't keep selling bonds forever -- what you end up with is a serious devaluation of the dollar (which we are seeing right now) because the worth of your word (which is all you have with bonds -- your word that you will pay them back with interest) goes down with each bond you have outstanding.

It seems like if people make bad decisions when borrowing, or lending, or investing, that's mostly the risk of doing business. I don't want to see anyone out on the street, but short of that, these people should pretty much be on their own. Won't propping up failed business deals only contribute to whatever recklessness allowed them to begin with?

http://blogs.wsj.com/wallstreetcrisis/2 ... rs-on-aig/

AIG's particular problem is that they have a huge business in bond insurance. Most of the time, this is a cash-cow line of business, because bonds hardly ever are defaulted and you end up generating tons of premiums and never having to pay anything out. When the bonds you insure start defaulting, though, the bond holders (for example, beneficiaries of sub-prime mortgage insurance) come to you to be made whole.

So the reason they are singled out for bailout is that if they fail to make whole the bond holders (the mom-and-pop banks and mortgage banks around the country) whole, then the ripple effect will eventually wipe out the nation's economic structure.

The whole sub-prime loan situation is an unfortunate "unintended consequence" of Carter-era low-income-housing policy. The original policy was intended to increase home ownership in the country, but starting in the late 90's, it had been usurped in order to put otherwise financially stable buyers into much more home than they can afford. So long as property values continued to go up and interest rates remained the same, it was all fine. Once the housing bubble burst and interest rates went up, suddenly all of those people were upside-down in their properties, and simply walked away, leaving the lenders holding the bag. Those lenders in turn called in the insurance on those mortgages, and this is why AIG suddenly comes up short of cash and ready to go into bankruptcy itself.

[Zool]

Here's a very thorough and clear explanation of what happened:
http://www.thisamericanlife.org/extras/ ... script.pdf

from here:
http://www.thisamericanlife.org/Radio_E ... sched=1242

[xavier]

Actually I was wrong -- the money isn't coming from China or even the American taxpayer -- it's coming from the breakup of AIG:

"The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders," the statement said.

http://www.thestreet.com/story/10437758 ... icleseries

In other words, the Fed acted in this case as an 80's-style corporate raider, interesting...

[Jabberwocky]

The whole sub-prime loan situation is an unfortunate "unintended consequence" of Carter-era low-income-housing policy. The original policy was intended to increase home ownership in the country, but starting in the late 90's, it had been usurped in order to put otherwise financially stable buyers into much more home than they can afford.

My understanding of the sub-prime loan doesn't involve any government housing policies. In fact, you could say the problem arose out of a lack of government regulation. The problem is purely a result of very short sighted and predatory investment practices of private-sector investors.

Or is there some governmental tie-in you know about that I don't?

[xavier]

The whole sub-prime loan situation is an unfortunate "unintended consequence" of Carter-era low-income-housing policy. The original policy was intended to increase home ownership in the country, but starting in the late 90's, it had been usurped in order to put otherwise financially stable buyers into much more home than they can afford.

My understanding of the sub-prime loan situation is substantially different. It has nothing to do with a carter-era policy, or any other government housing policy. In fact, you could say the problem arose out of a lack of government regulation. The problem is purely a result of very short sighted and predatory investment practices of private-sector investors.

Or is there some governmental tie-in you know about that I don't?

The current manifestation of the crisis is almost entirely regulation-related (lack thereof, actually), but it was the exploitation of those Carter policies and the loopholes in them (that went on not only unchecked, but almost endorsed, by both the Clinton and Bush administrations as well as both the Republican and Democratic Congresses during their terms) that allowed the current meltdown to happen.

It's almost ironic seeing John McCain rail against the deregulatory environment that made these exploits possible, when it was his own Senate economics committees that were at least partly responsible for letting them happen in the first place. But that's just a fact of having been in Washington for a quarter-century -- at some point, something you do as a legislator is going to come back and bite you in the ass.

[Jabberwocky]

I see, so the policy you're talking about was to remove regulations. That would make sense.

[VictorMoran]

It is a joke that people are still trying to pin this on Clinton and Carter.

This happened in the 30’s and to prevent it from happening again congress created the Glass-Steagall Act. But then in 1999 the republican congress repealed with Bill Graham’s
Financial Services Modernization Act. (Google it so you can see what it is)

Let me tell you as bad as it is we can say we are lucky, because in 2001 these same people wanted to put social security in the same deregulated financial market, I hope people remember the bruhaha in 2001.
The idea was so insane that even the nutjobs republican in congress did not pass it.
If McCain had his way in 2004 when the republican had absolute majority, Today we would be seen social security also flushed down the toilet.
McCain came back with 2004 again with the idea of privatizing social security http://www.youtube.com/watch?v=ZgvgBpXPMko

Even when back pedalling and saying he will not privatize it, the solution he gives is individual private accounts, in other word 401k types of accounts that are run by hedge funds managers and we know what happen to those this week.
I have no idea how it is that this idiot has any kind traction with the American people, It is like the American people is anesthetized and cannot see that this man is reading talking point lines, and is having problem memorizing them.

[xavier]

It is a joke that people are still trying to pin this on Clinton and Carter.

It's probably because Clinton signed the bill that repealed Glass-Steagall:

Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999 by the Gramm-Leach-Bliley Act signed by William J. Clinton.[1][2]

On November 12, 1999, President William J. Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate. Some economists have criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.[8][9]

http://en.wikipedia.org/wiki/Glass-Steagall_Act

This happened in the 30’s and to prevent it from happening again congress created the Glass-Steagall Act.

As you can read in the above, all that Glass-Steagall really did is create the FDIC. That body is there to insure the assets of individual depositors. Agreed that its other provisions have been picked apart over time, and agreed that those later actions partly caused what we have now.

The mess in 1929 was individual speculation exacerbated by unchecked leveraged buying; you could buy stock on margin with as little as 10% in the 20's. When the margin calls came, though, there was nothing left to cover them, and hence the Depression.

Agreed, the mess today is similar, only that instead of stock, people were buying real estate, and the speculation was done at the institutional level (on mortgage-backed securities) instead of the individual.

The reason I bring up Carter is because under his watch the ability for those who otherwise would not be able to afford a home, could now buy one. That in itself is a good thing. It's been the bastardization and exploits of loopholes in that act since then, that have led to the mortgage meltdown we currently are in.

I don't think I was blaming Carter. I was blaming the "law of unintended consequences" that continually comes up again and again as a result of legislative acts.

this man is reading talking point lines, and is having problem memorizing them.

Funny, and sad, but true...

[warmi]

I have no idea how it is that this idiot has any kind traction with the American people, It is like the American people is anesthetized and cannot see that this man is reading talking point lines, and is having problem memorizing them.

I am sure there are a lot of peopel wondering the same about Obama.

[xavier]

I have no idea how it is that this idiot has any kind traction with the American people, It is like the American people is anesthetized and cannot see that this man is reading talking point lines, and is having problem memorizing them.

I am sure there are a lot of peopel wondering the same about Obama.

The difference in Obama's case is that while he's got his main themes that he tries to stay on, if you ask him a question that's off-theme, he won't respond with a non-sequitor that is on-theme (or, if you are Sarah Palin, refer you to the campaign managers for a response). For a guy that likes to play up his "straight talk", we get too little (none, now) of that from McCain.

Back on topic, however...I was wondering this on the way home tonight, and decided to look deeper:

Part of the voting record on the repeal of the Glass-Steagall Act (aka "Gramm-Leach-Bliley Financial Services Modernization Act"):

McCain (R-AZ), Yea

http://www.senate.gov/legislative/LIS/r ... vote=00105

Not surprising given that he lets Gramm do his economic thinking for him.

This seems like it would be a hand-carved gold-plated Christmas gift for the Obama campaign -- I just can't figure out why they've not played this one up yet. You basically tie McCain to the financial collapse, with the Senate voting record to make it stick. It's in the public record, so it hardly qualifies as an "October surprise". Wonder what they are waiting for. *shrug*

[warmi]

This seems like it would be a hand-carved gold-plated Christmas gift for the Obama campaign -- I just can't figure out why they've not played this one up yet. You basically tie McCain to the financial collapse, with the Senate voting record to make it stick. It's in the public record, so it hardly qualifies as an "October surprise". Wonder what they are waiting for. *shrug*

Perhaps because the real thing was passed 90-8.
http://www.senate.gov/legislative/LIS/r ... vote=00354

McCain did't vote at all and Biden was for it.

I will agree though with one thing .. this is THE time for demagogues and populists and if Obama doesn't pull this one off he will be regarded as greater disaster than Kerry and his 2004 failure.

[xavier]

This seems like it would be a hand-carved gold-plated Christmas gift for the Obama campaign -- I just can't figure out why they've not played this one up yet. You basically tie McCain to the financial collapse, with the Senate voting record to make it stick. It's in the public record, so it hardly qualifies as an "October surprise". Wonder what they are waiting for. *shrug*

Perhaps because the real thing was passed 90-8.
http://www.senate.gov/legislative/LIS/r ... vote=00354

McCain did't vote at all and Biden was for it.

Actually, the Senate vote was the real vote on it, as far as the Senate is concerned. The conference report is just working out whatever minor differences exist between the House and Senate versions of the same bill. There typically is nothing new in that which is why most of the time the conference report votes pass by wide margins.

Biden was a "yea" too, but he's not the one out there clamoring for more regulation.

I will agree though with one thing .. this is THE time for demagogues and populists and if Obama doesn't pull this one off he will be regarded as greater disaster than Kerry and his 2004 failure.

Agreed. Obama's supporters keep asking him why he doesn't get more aggressive, and he keeps telling them to have patience -- you almost have to think that there is going to be an October surprise...and if not, the Democrats will have managed to kick themselves in the junk a third time in a row...

[warmi]

Agreed. Obama's supporters keep asking him why he doesn't get more aggressive, and he keeps telling them to have patience -- you almost have to think that there is going to be an October surprise...and if not, the Democrats will have managed to kick themselves in the junk a third time in a row...

I think he is actually getting nastier with every day.
At this point it is just a matter of couple days , perhaps a week ( depening how things go on Wall Street) and we will know if his new strategy is working or if there is something deeper going on , perhaps even transending current market troubles.

Or maybe everyone is just dead wrong ... and Obama's supporters are in for a niceTruman style surprise.