The AIG Rescue
A few months ago, neoconservatives were screaming bloody murder when Hugo Chavez nationalized the phone company. Today a neoconservative U.S. Government nationalized AIG, the largest insurance company in the world, because the collective banks of the world refused to make a bridge loan to the insurer of most of the bonds they hold.
AIG was the linch pin to the shadow banking system–the $50 trillion of Credit Default Swaps–that I have be writing about for a long time. By insuring toxic bonds made up of sub prime mortgages, AIG allowed the banks to sell them to pension funds as AAA credits. It was a scam which AIG helped the banks to pull off. And then the whole house of cards collapsed and AIG was left holding the bag, potentially to pay insurance out on $ billions of defaulted bonds. So the banks that needed this insurance to load the crap into pension funds and other fiduciaries, now refuse to keep their insurer alive and win the game of chicken with the Fed.
We have been talking about the Great Deleveraging and how it puts downward pressure on the prices of all assets except government bonds. A failure of AIG would have accelerated that process into a true crash of 1929 proportions. However, AIG was the enabler for the big banks all over the world. Paulson should lay off the 2 year $85 billion note to a consortium of banks, keep 20% of the warrants in the Treasury for the rescue and attach the rest of the warrants to the loans as part of the sale to a bank consortium.
This was a big bankers game. The US taxpayers should not be left holding the bag.
There is a strong case, once the dust has settled, for an investigation into how this situation arose, which you have outlined in great detail. Senior managers should be held to account for their actions and decisions and there needs to be enforced regulation to ensure that it doesn’t happen again.
Not only can American tax payers expect to pay for the largesse of some of AIG management, they will also feel the pain through their own pension funds, which have seen massive falls.
There is a strong case, once the dust has settled, for an investigation into how this situation arose, which you have outlined in great detail. Senior managers should be held to account for their actions and decisions and there needs to be enforced regulation to ensure that it doesn’t happen again.
Not only can American tax payers expect to pay for the largesse of some of AIG management, they will also feel the pain through their own pension funds, which have seen massive falls.
you are 100 percent correct on this one–a huge relief that this took place but a sad day for free markets– no one ever thought that this could/would happen–there will be a price to pay by alot of people–not sure but guess that the taxpayers will make money on this trade— hate to say it but a whole new layer of govt regs and enforcement are needed—one result is that our capital markets will be less competitive–another, and this is probably good, is that many of our best and brightest will stay away from Wall street— the impact will be far reaching–also a plus for Dems and Obama–but both sides have blood on their hands here—doug
you are 100 percent correct on this one–a huge relief that this took place but a sad day for free markets– no one ever thought that this could/would happen–there will be a price to pay by alot of people–not sure but guess that the taxpayers will make money on this trade— hate to say it but a whole new layer of govt regs and enforcement are needed—one result is that our capital markets will be less competitive–another, and this is probably good, is that many of our best and brightest will stay away from Wall street— the impact will be far reaching–also a plus for Dems and Obama–but both sides have blood on their hands here—doug
Do you know if the collective banks refused a bail out loan because they hoped the US would step in?
Bush is now the pork barrel president. He’s President Pork. On more level than one.
Do you know if the collective banks refused a bail out loan because they hoped the US would step in?
Bush is now the pork barrel president. He’s President Pork. On more level than one.
An economy built on debt is a false economy.
An economy built on debt is a false economy.
Before everybody – that’s you Jon and commentators – jumps on me for this comment I want to point out that I in no way endorse, agree or approve of the Fed’s actions. I think Bear Stearns, Fannie Mae, Freddie Mac and AIG should have all failed without government intervention.
However…
Reading the press release from the Fed and some commentary, it seems to me that the Fed and the Treasury rolled AIG and by extension the Shadow Banking System. Nowhere did I read that the banks who refused to lend money to AIG were offered assets in return.
The two-year line of credit to AIG from the Fed is backed by 79.9% of the assets of AIG and the U.S. government is now the effective owner of AIG for the next two years. The terms of the note are to be repaid within the next two years through the sale of AIG assets and failure to pay off the note in full results in the government seizing the rest of the company. The interest is around 11.4%, not a bad return considering the Fed is paying 2% and for the Treasury it’s nothing.
I don’t see how this deal gives anything good to the Shadow Bankers. It doesn’t raise home prices, it doesn’t ease inflation, it doesn’t make the toxic derivatives go away and it doesn’t make interest rates lower, it makes them higher. It also sends the message that public money can be had if you turn over your company to the government and to regulation.
My observation is that the first third of the credit crisis is over but there is a long way to go and the next investment bank in trouble will not be offered public money. Plus when Congress gets off its ass and starts holding hearings all those fast and loose players are going to be in the spotlight. Guess what comes next?
More regulation.
That’s right boys and girls, you want a piece of the public treasury to bail you out? Hand over control of the board and prepare to be regulated.
Not bad for a Republican administration. FDR would be so proud.
Before everybody – that’s you Jon and commentators – jumps on me for this comment I want to point out that I in no way endorse, agree or approve of the Fed’s actions. I think Bear Stearns, Fannie Mae, Freddie Mac and AIG should have all failed without government intervention.
However…
Reading the press release from the Fed and some commentary, it seems to me that the Fed and the Treasury rolled AIG and by extension the Shadow Banking System. Nowhere did I read that the banks who refused to lend money to AIG were offered assets in return.
The two-year line of credit to AIG from the Fed is backed by 79.9% of the assets of AIG and the U.S. government is now the effective owner of AIG for the next two years. The terms of the note are to be repaid within the next two years through the sale of AIG assets and failure to pay off the note in full results in the government seizing the rest of the company. The interest is around 11.4%, not a bad return considering the Fed is paying 2% and for the Treasury it’s nothing.
I don’t see how this deal gives anything good to the Shadow Bankers. It doesn’t raise home prices, it doesn’t ease inflation, it doesn’t make the toxic derivatives go away and it doesn’t make interest rates lower, it makes them higher. It also sends the message that public money can be had if you turn over your company to the government and to regulation.
My observation is that the first third of the credit crisis is over but there is a long way to go and the next investment bank in trouble will not be offered public money. Plus when Congress gets off its ass and starts holding hearings all those fast and loose players are going to be in the spotlight. Guess what comes next?
More regulation.
That’s right boys and girls, you want a piece of the public treasury to bail you out? Hand over control of the board and prepare to be regulated.
Not bad for a Republican administration. FDR would be so proud.
“The two-year line of credit to AIG from the Fed is backed by 79.9% of the assets of AIG and the U.S. government is now the effective owner of AIG for the next two years.”
“I don’t see how this deal gives anything good to the Shadow Bankers.”
I’m not jumping on you, just making my own observation. This deal transfers the risk of default from AIG to the taxpayers. That is the “good” done to the shadow bankers.
However I agree that this is better than Big Mamma just pulling out her handbook and delivering a giant wad of cash to AIG in return for nothing.
The question is, if this crisis passes, and things settle back down, and people’s attention begin to wander, will there then be quiet Saturday-morning deals cut in Congress to hand the assets and the money and additional deregulation and the Presidential Medal of Freedom and whatever else is requested back to AIG?
The shareholders of AIG should suffer. Even if that means institutional funds, which represents ordinary investors who have not been willingly playing this insane game of infinite credit expansion. That way, the little guys will agitate very loudly for the big guys to knock this crap off, and we’ll have another five or ten years until the big guys figure out another legal way to cheat.
“The two-year line of credit to AIG from the Fed is backed by 79.9% of the assets of AIG and the U.S. government is now the effective owner of AIG for the next two years.”
“I don’t see how this deal gives anything good to the Shadow Bankers.”
I’m not jumping on you, just making my own observation. This deal transfers the risk of default from AIG to the taxpayers. That is the “good” done to the shadow bankers.
However I agree that this is better than Big Mamma just pulling out her handbook and delivering a giant wad of cash to AIG in return for nothing.
The question is, if this crisis passes, and things settle back down, and people’s attention begin to wander, will there then be quiet Saturday-morning deals cut in Congress to hand the assets and the money and additional deregulation and the Presidential Medal of Freedom and whatever else is requested back to AIG?
The shareholders of AIG should suffer. Even if that means institutional funds, which represents ordinary investors who have not been willingly playing this insane game of infinite credit expansion. That way, the little guys will agitate very loudly for the big guys to knock this crap off, and we’ll have another five or ten years until the big guys figure out another legal way to cheat.
I’ve always voted Conservative because I believe in free markets, but I think recent years need more government oversight… Things have just gotten way out of hand and greed has taken over as a replacement for sound business judgment. Thanks for this post. I’m sad to say that I probably won’t vote Conservative this time, but it’s just too crazy to allow even the potential of 4 more years of the same stuff… or perhaps McCain will actually lay out a plan to put some people in prison, and tell us how he will right these wrongs, and what systems will prevent it again…
I’ve always voted Conservative because I believe in free markets, but I think recent years need more government oversight… Things have just gotten way out of hand and greed has taken over as a replacement for sound business judgment. Thanks for this post. I’m sad to say that I probably won’t vote Conservative this time, but it’s just too crazy to allow even the potential of 4 more years of the same stuff… or perhaps McCain will actually lay out a plan to put some people in prison, and tell us how he will right these wrongs, and what systems will prevent it again…
Remember when BushCo tried to privatize Social Security? What would have happened under that scenario? Right, trillions of retirees money would have disappeared.
I don’t think we’ll be hearing much about killing off SSI any time soon…
Remember when BushCo tried to privatize Social Security? What would have happened under that scenario? Right, trillions of retirees money would have disappeared.
I don’t think we’ll be hearing much about killing off SSI any time soon…
Brian, good devil’s advocacy at a time when it’s hard to believe this administration can do anything right. I suspect that we are seeing some of the old line “conservatives” starting to tell BushCo in behind the scenes conversations, that he screwed the pooch the cat and the canary, and being lame duck and politically toxic, no more voting lockstep.
Anyway, it’s nice that folks can tie the neo-cons (whether correctly or incorrectly) to the biggest nationalization of private property in years. The message (though the ditto heads will never get it) is that socialism works as well as capitalism in certain instances, and capitalism unchecked is very dangerous to the commonwealth.
However, I bet you can go to a lot of intertubes comments and find BHO being tarred as a “dangerous socialist”.
Brian, good devil’s advocacy at a time when it’s hard to believe this administration can do anything right. I suspect that we are seeing some of the old line “conservatives” starting to tell BushCo in behind the scenes conversations, that he screwed the pooch the cat and the canary, and being lame duck and politically toxic, no more voting lockstep.
Anyway, it’s nice that folks can tie the neo-cons (whether correctly or incorrectly) to the biggest nationalization of private property in years. The message (though the ditto heads will never get it) is that socialism works as well as capitalism in certain instances, and capitalism unchecked is very dangerous to the commonwealth.
However, I bet you can go to a lot of intertubes comments and find BHO being tarred as a “dangerous socialist”.
Brian,
You make a good point: an ostensibly anti-New Deal administration is busy responding in a rather New Deal manner to the financial crisis. Even funnier, is the sight of McCain/Palin out stumping for more New Deal regulatory actions of the kind they’ve spent most of their careers criticizing.
Of course Phil Gramm is still pacing around in the background muttering his favorite Andrew Mellon quotes: liquidate! liquidate! liquidate! A vote for McCain is still a vote for Hoover
Brian,
You make a good point: an ostensibly anti-New Deal administration is busy responding in a rather New Deal manner to the financial crisis. Even funnier, is the sight of McCain/Palin out stumping for more New Deal regulatory actions of the kind they’ve spent most of their careers criticizing.
Of course Phil Gramm is still pacing around in the background muttering his favorite Andrew Mellon quotes: liquidate! liquidate! liquidate! A vote for McCain is still a vote for Hoover
I know it’s fun to poke the ‘socialist’ stick in the eye of people who have spent their lives using it as code for everything they’re opposed, but I’m still not sure that’s what’s going on here.
If it hasn’t happened already, I’m sure the Feds will stop insuring the type of ‘securities’ that the G-B-L Act enabled. That alone seems like a massive, if not fatal blow for the shadow banking system.
In other words, this seems less like socialism, and more like basic law-and-order, with a very bad actor being pulled off the street and thrown in jail. So I just can’t see this as ‘nationalization’ in the traditional, third-would sense, where valuable, functioning businesses are simply taken over by the state under some fig leaf version of Marxist ideology, then milked for revenue by the folks in power. If anything, this seems like the exact opposite – and an essential first step in a return to the mean.
Actually, a second step. Combined with the Mac & Mae action, this looks like the other mandatory play in long overdue government correction.
First, a program that was federal in everything but name has been identified as such, and has now been pulled back into the fold. On the other side of the coin, a private organization that had built a business serving needs that could only arise in a lawless environment has been brought to heel.
I’ve said before, there’s plenty of blame to go around. But on balance, I’d say the core of the problem rests on the Republican’s side, if for no other reason than they’ve been at the helm for the past eight years, and had plenty of time to see that government was wildly over-extended in one area, and criminally negligent in another.
Whether they were brought low by bad ideology or plain arrogance, the result is the same: they have now demonstrated, beyond all doubt, that they simply don’t know how to govern. In fact, it’s not clear that they even understand what government is supposed to do (McCain, after all, says he needs to ‘start up a committee’ to figure it out ‘what happened’). They certainly haven’t recognized limited but vigilant government as the public good its supposed to be.
I don’t think it’s strange that the one person who has been entirely absent from the headlines in all this is President Bush. Always a lightweight, it’s as though he’s now abdicated completely, leaving Hank Paulson to manage the last 150 days on his own, which is probably a good thing. For the first time, we’re seeing the kind of well-grounded authority that’s been in short supply from the White House since day one.
If there are costs to the taxpayer, I’m afraid they’ll have to be written off as the costs of ‘deleveraging’ the nation from its relationship with the GOP, and the trust they held as a reliable vendor of governance. Having just been handed this enormous steaming pile, it’s time we voted them into oblivion.
And as long as they go on believing “government is not the solution, it’s the problem” they have no business anywhere near actual government. Bad government is the problem, and it comes in two flavors – too much, and not enough. The solution should be self-evident.
I know it’s fun to poke the ‘socialist’ stick in the eye of people who have spent their lives using it as code for everything they’re opposed, but I’m still not sure that’s what’s going on here.
If it hasn’t happened already, I’m sure the Feds will stop insuring the type of ‘securities’ that the G-B-L Act enabled. That alone seems like a massive, if not fatal blow for the shadow banking system.
In other words, this seems less like socialism, and more like basic law-and-order, with a very bad actor being pulled off the street and thrown in jail. So I just can’t see this as ‘nationalization’ in the traditional, third-would sense, where valuable, functioning businesses are simply taken over by the state under some fig leaf version of Marxist ideology, then milked for revenue by the folks in power. If anything, this seems like the exact opposite – and an essential first step in a return to the mean.
Actually, a second step. Combined with the Mac & Mae action, this looks like the other mandatory play in long overdue government correction.
First, a program that was federal in everything but name has been identified as such, and has now been pulled back into the fold. On the other side of the coin, a private organization that had built a business serving needs that could only arise in a lawless environment has been brought to heel.
I’ve said before, there’s plenty of blame to go around. But on balance, I’d say the core of the problem rests on the Republican’s side, if for no other reason than they’ve been at the helm for the past eight years, and had plenty of time to see that government was wildly over-extended in one area, and criminally negligent in another.
Whether they were brought low by bad ideology or plain arrogance, the result is the same: they have now demonstrated, beyond all doubt, that they simply don’t know how to govern. In fact, it’s not clear that they even understand what government is supposed to do (McCain, after all, says he needs to ‘start up a committee’ to figure it out ‘what happened’). They certainly haven’t recognized limited but vigilant government as the public good its supposed to be.
I don’t think it’s strange that the one person who has been entirely absent from the headlines in all this is President Bush. Always a lightweight, it’s as though he’s now abdicated completely, leaving Hank Paulson to manage the last 150 days on his own, which is probably a good thing. For the first time, we’re seeing the kind of well-grounded authority that’s been in short supply from the White House since day one.
If there are costs to the taxpayer, I’m afraid they’ll have to be written off as the costs of ‘deleveraging’ the nation from its relationship with the GOP, and the trust they held as a reliable vendor of governance. Having just been handed this enormous steaming pile, it’s time we voted them into oblivion.
And as long as they go on believing “government is not the solution, it’s the problem” they have no business anywhere near actual government. Bad government is the problem, and it comes in two flavors – too much, and not enough. The solution should be self-evident.
Alex B,
I wanted to ask “Is Hank Paulson now our Acting President?” but you beat me to it. I guess Bush and Cheney are keeping quiet to give McCain a better shot at stealing the “Change” label.
Alex B,
I wanted to ask “Is Hank Paulson now our Acting President?” but you beat me to it. I guess Bush and Cheney are keeping quiet to give McCain a better shot at stealing the “Change” label.
And Alex … altho’ some may attempt a comparison to Hugo Chavez, that’s bogus. The right comparison is to FDR — and it’s VERY fair. FDR saved capitalism from the idiocy of simple-minded capitalists and the people (predominantly Republicans) who have been hard at work chopping away at the foundations of the New Deal deserve to OWN this “enormous stinking pile.”
And Alex … altho’ some may attempt a comparison to Hugo Chavez, that’s bogus. The right comparison is to FDR — and it’s VERY fair. FDR saved capitalism from the idiocy of simple-minded capitalists and the people (predominantly Republicans) who have been hard at work chopping away at the foundations of the New Deal deserve to OWN this “enormous stinking pile.”
Alex/Seth,
http://thinkprogress.org/2008/09/17/perino-fundamentals/
I think Bush is going to have a hard time not making McCain look out of touch, so he’s staying mum.
Alex/Seth,
http://thinkprogress.org/2008/09/17/perino-fundamentals/
I think Bush is going to have a hard time not making McCain look out of touch, so he’s staying mum.