AIG Bailout?

[Purron]

Government Mulls AIG Bailout as Options Grow More Limited. - Financials * US * News * Story - CNBC.com

 

[walkinwood]

Its happened
http://www.nytimes.com/2008/09/17/business/17insure.html?_r=1&hp&oref=slogin

Wonder where this ends! Is WAMU next?

 

[ziggy29]

Any company that wants to grow to the point of being "too big to fail" needs to be willing to accept a reasonable amount of regulation to make their chances of failing very close to zero, IMO.

 

[lazygood4nothinbum]

i agree and so does william greider: what are we getting in return?

 

[Milton]

$85 billion! So much for the promised end to the bailout culture.

 

[brewer12345]

There is a big difference between WM and AIG, IMO. AIG did lots of stuff at the holding company level that caused them a liquidity crisis. WM did most everything out of bank entities, which have all the liquidity goodies that go with it: discount window access, Federal Home Loan Bank membership, etc. So unless something causes a massive run on the bank by actual depositors, its hard to see how WM will have a liquidity crisis that will cause them to suddenly fail. The $64k question for WM is whether they have so many bad loans on the book that they eventually run out of capital. I don't think anyone can guess as to whether they have enough capital with any degree of confidence, at least at this point in time.

 

[Milton]

So unless something causes a massive run on the bank by actual depositors, its hard to see how WM will have a liquidity crisis that will cause them to suddenly fail.

I don't think anyone can guess as to whether they have enough capital with any degree of confidence, at least at this point in time.

There is a fair chance that the uncertainty described in the second paragraph will be the "something" mentioned in the first paragraph.

Let's hope not.

 

[free4now]

With Fannie, Freddie, Merrill, and AIG, the guv is spending hundreds of billions on these bailouts, just in the past week or so. That's more than the prez said the Iraq war would cost originally. Who is making these kinds of spending decisions anyway? I haven't seen any house or senate involvement at all. Can Bush just say "Yeah we'll cover it" as he runs for the exits?

 

[CompoundInterestFan]

With Fannie, Freddie, Merrill, and AIG, the guv is spending hundreds of billions on these bailouts, just in the past week or so.

I didn't think they were involved with Merrill. BoA scooped them up.

As a follow up question, though, exactly how much money does the Fed have left to bail companies out?

 

[ziggy29]

I didn't think they were involved with Merrill. BoA scooped them up.

As a follow up question, though, exactly how much money does the Fed have left to bail companies out?

They can print an infinite amount of fiat money. The question then becomes what happens to the economy, inflation and the dollar as a result.

 

[Milton]

Exactly. An empire founded on debt can't be sustained indefinitely, and the printing presses will be operating faster and faster.

 

[al_bundy]

They can print an infinite amount of fiat money. The question then becomes what happens to the economy, inflation and the dollar as a result.

these aren't bailouts, not even close to Chrysler in 1980. the interest on the AIG loan is 8.5% and Fannie is around 10% and the government is taking over management instead of letting the old management use the money for bonuses.

when it's over the government will just sell the stock

 

[Robert the Red]

... the interest on the AIG loan is 8.5% ...

Actually, it is 8.5% over LIBOR 3 month, so it is currently 11.3%, which is over $9 billion per year in interest. In other words, the new management at AIG is under pressure to sell off the assets (insurance companies, aircraft holding company, ...) at a rapid rate and repay the loan ASAP. That is, there will be an orderly unwinding of AIG, rather than a "disordered" unwinding.

I doubt that anyone on Earth has solid knowledge about whether the Fed will lose or make money on this deal. The US made money on the Chrysler bailout in the early 1980s, and made money on the mortgage bailouts of the Depression. And lost a lot of money in the S&L fiasco of the late 1980s.

What is interesting is that Paulson, from Wall Street, is determined to "haircut" the shareholders of these companies, even those that continue to operate (Fannie & Freddie & AIG & Bear Stearns). But he doesn't seem to want to hurt those who did business with them.

 

[al_bundy]

i think bernanke said earlier this year that the goal over the next 2 years is an ordered liquidation of any company in trouble so that it doesn't torpedo the markets.

Yahoo is saying AIG had 73% institutional ownership, so this is probably a message to the investing community to start acting like owners and not just OK the election of any director that you golf with

 

[freebird5825]

EXTRA EXTRA...read all about it...

Morningstar - MarketWatch: AIG gets Fed rescue in form of $85 billion loan

 

[ladelfina]

where is Paulson's authority to do this?

 

[ziggy29]

where is Paulson's authority to do this?

We can't let pesky inconveniences like the U.S. Constitution get in the way of the federal government's business, can we?

 

[harley]

All I can say is make sure to vote in November. This kind of government intervention wouldn't be happening in a Republican administration.

 

[Martha]

where is Paulson's authority to do this?

Sorry, I am talking off for a bit so I don't have a cite, but the fed has pretty broad powers to lend money in unusual and exigent circumstances.

 

[ChrisC]

Section 13 (3) of the Federal Reserve Act says:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

 

[ladelfina]

wow.. wait 'til the masses of "individuals" in "exigent circumstances" get ahold of this news.

Why, then, did the Chrysler bailout ($5+ billion in today's dollars of loan guarantees) require an act of Congress and Carter's signature?

 

[ziggy29]

Why, then, did the Chrysler bailout ($5+ billion in today's dollars of loan guarantees) require an act of Congress and Carter's signature?

I suspect that it's because the Fed is supposed to watch over the financial industry, not automakers. Not that I think that's sufficient justification, but I suppose that's what it behind the difference.

Note also that the post-9/11 airline bailouts needed to go through the legislative process as well.

 

[ChrisC]

wow.. wait 'til the masses of "individuals" in "exigent circumstances" get ahold of this news.

Why, then, did the Chrysler bailout ($5+ billion in today's dollars of loan guarantees) require an act of Congress and Carter's signature?

The Fed is not required to open up its discount window or credit facilities to anyone, if you read the statute carefully. As a matter of policy, the Fed only extends a line if its fully secured with good collateral. It was "unprecedented" for it to advance funding to Bear Stearns -- it denied funding to Lehman, and evidently had a major change of direction over AIG.

The Fed and the Federal Reserve Banks do not consider themselves part of the Administration, but pride themselves as being independent of the Administration in many respects. The Fed made sure it had the blessing of the Congressional leadership for the line of credit to AIG. So, the Fed and NY Federal Reserve Bank acted in a manner consistent with the statute, but you can be pretty sure they expect to be repaid based on the collateral it took as security, which probably didn't include any mortgage-backed securities.

If a giant manufacturing company, like one of the big three auto companies, sought lending from the Fed today, I doubt it could meet the test that the national economy requires it to be propped up with Fed borrowings, let alone satisfy standards that its failure poses a systemic risk to payments system or national economy.

 

[Art G]

AIG is so vast, they have got to be bailed out. They were, just last year, one of only 8 companies in the world that were rated AAA. Go figure.

 

[ziggy29]

AIG is so vast, they have got to be bailed out. They were, just last year, one of only 8 companies in the world that were rated AAA. Go figure.

I'm a good capitalist, I think, but any business that wants to grow to the point of being "too big to fail" has got to accept a reasonable amount of regulation to greatly reduce the chance of meltdowns like these from occurring.