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After AIG Rescue, Fed May Find More At Its Door
WASHINGTON - In one $85 billion (47 billion pound) fell swoop, the U.S. Federal Reserve may have wiped out what credibility it won resisting Lehman Brothers' rescue plea and opened its door to countless other companies to come calling for cash.
The AIG logo is shown Wednesday, Sept. 17, 2008 in New York. U.S. stocks headed for a lower open Wednesday, with investors still anxious about the financial sector even after the government bailed out the insurer American International Group Inc. and Barclays PLC bought a chunk of Lehman Brothers. (AP Photo/Mark Lennihan) By providing a massive loan to American International Group on Tuesday, just two days after refusing to use public funds to save Lehman Brothers from bankruptcy, the central bank also invited tough questions on how exactly it determined whether a company was too big to fail.
Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.
"They pretended they were drawing a line in the sand with Lehman Brothers but now two days later they're doing another bailout," said Nouriel Roubini, a professor at New York University's Stern School of Business.
"We're essentially continuing a system where profits are privatized and...losses socialized," Roubini said, adding that auto makers, airlines and other struggling businesses would no doubt be asking for government help too.
The government was hard pressed to say no to AIG because of concerns that its collapse would harm thousands of companies around the world and cause chaos in the $62 trillion market for credit default swaps, where it is a big player.
Many on Wall Street were clamouring for a rescue earlier on Tuesday, and AIG's share price swung wildly throughout the day as rumours swirled of an on again, off again government rescue.
But Roubini said instead of handing out money to firms that made bad bets -- which could inadvertently encourage more risky behaviour if companies think they have a safety net -- the government should be buying up mortgages and rewriting the terms so that households are not buried in debt.
STRINGS ATTACHED
To be sure, the Fed attached quite a few strings to its AIG funding deal. The loan carries a high interest rate, the government can veto any dividends, and AIG is expected to sell assets over the next two years to repay its debt. Senior management will be replaced.
But the central bank also followed a pattern established with Bear Stearns in March and repeated with Fannie and Freddie earlier this month of essentially wiping out shareholders while protecting those who held debt.
Some economists warned that investors had caught on and were betting on future bailouts by selling stock and buying bonds in struggling firms. That ends up pushing down a company's share price, which can exacerbate its troubles.
"If the message is that any time something like this pops up we're going to wipe out the equity and coddle the bondholders, that is its own sort of moral hazard," said Michael Feroli, an economist with JPMorgan in New York.
"I don't think you have to be a die-hard free market advocate to be at least a little bit concerned."
BERNANKE ON THE HILL
Fed officials said that they needed to act because of AIG's extensive involvement in financial markets. Through its insurance, risk and asset management businesses, AIG has dealings with many thousands of companies all over the world, so a bankruptcy would have had huge global repercussions.
RBC Capital Markets analyst Hank Calenti pegged the market impact of an AIG failure at more than $180 billion, or about half of the total capital that financial firms have raised since the beginning of the credit crisis last year.
But JPMorgan's Feroli said the Fed could have chosen to let AIG fail, just as it had done with Lehman.
"We don't know if the disease would have been worse than the medicine," he said. "We'll never know. But we know we lived through Lehman."
He said the central bank needed to clearly explain when and why it would act to salvage a company in jeopardy or face the prospect of a long line of companies seeking bailouts.
Fed Chairman Ben Bernanke, who has stayed out of the public eye during the Lehman and AIG drama, is due to testify before a congressional committee next week and can expect some pointed questioning, Feroli said.
"He needs to provide some sort of clear demarcation of what is or is not a systemic risk."
"Of the many unconventional actions taken by the Fed in the current crisis, this may likely prove to be the most controversial and should make Bernanke's...testimony on Capitol Hill an interesting event."
Editing by Jan Dahinten
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123 Comments so far
Show AllFor sure with McBush and the momma bear we will be the most socialized nation on the planet - 18 billion to corp. farmers so they can feed us crap! Now the Wall St. we want no oversight folks need us to print more phony cash or do we have the Chinese print it for us? WAF'ed.
Why are Americans not pissed and demanding justice? The Feds should be helping the American home owners save their homes. Do we want all of these families on the streets of America?
I foresee these jackasses bring back the debtors prisons. This is where you will be thrown into prison and be made to work for no wages.
This peonage is the slickest way to enslave this country and they will get away with it because no one is fighting back. They are blaming people for taking the hook that they created to sell to the desperate who only wanted a piece of America. This was fraud from the beginning. People were talked into using these loans and took them in good faith.
You can piss and moan all you want about people being careless…..we all want the American Dream. We are all guilty of reaching out to achieve the fantasy, so we drink their highly advertise cool-aid.
They mixed the cool-aid; they need to be held accountable for it. Because no matter how you feel about it we are going to be the ones who will have to pay for it.
"Why are Americans not pissed and demanding justice?"
Because most Americans have no understanding of the details of these bailouts and the right-wing controlled corporate media is not about to educate them.
When I try to talk to people I know about these issues, I can see their eyes glazing over after about 10 seconds.
"Do we want all of these families on the streets of America?"
No one in this administration or on the board of the Fed gives a shit.
q
Hello? Would someone explain where this money is coming from? The politicians keep hounding on no money for Social Security. There seems to be enough money when the need arises for the good old boys. How clever! Perhaps someone would care to add up the amount of billions that we are now responsible for, just a rough estimate will do. No wonder they want to privatize social security. Just ask anyone who has just lost their retirement in this gargantuan swindle if that is a good idea.
Sweetheart, these are your taxes!
No they're loans from China that your taxes will forever pay the interest on.
Bear in mind that the people with the most money currently have the most power in Washington... therefore, any bailouts are going to be designed to maximize their profits and protection while the peasant class picks up the tab.
Over the past 25 years, we have witnessed the most incredible rape of the middle-class and poor since days of the robber-barons.
If you had a million dollars in 1983, you most likely have $3 million or more today... while the average person's net assets have dwindled by 25%.
But if everyone keeps voting for the Bushes, McCains and Palins, you will assure that the current trend will continue until the poor and middle-class are all surviving on gruel and living in mud huts.
The only meat your grandchildren will ever see will probably be rabbit or rat.
Or perhaps our offspring could eat the rich. Not so much meaty as lardy fat.
"Over the past 25 years, we have witnessed the most incredible rape of the middle-class and poor since days of the robber-barons."
Very well put.
q
Agreed.
Remember, it started with the acceptance, by Americans, of Ronald Reagen's policies and "conservative economic ideology." The middle class and poor must reject these policies and ideologies if they are to progress. Use your vote wisely.
must keep the oligarchy running smoothly.
Gosh - I don't have a problem with taxpayers loaning corporations money to prevent them from failing and destroying the rest of this great economy. Just make sure that after the first year's low introductory rate we raise it at the same reasonable rates that any other sub-prime lender, or credit card company would charge, along with any late fee penalties & annual fees. Of course, those charges would automatically be deducted from the salaries of the board of directors.
Glad to, Annabelle. The national debt before the Fannie/Freddie buyout was close to ten trillion. F/F increased it to 15 trillion. The Iraq and Afghanistan occupations will add another 3 trillion at least. Thats 18 trillion dollars. But as more and more privately owned LLC's (limited liability corporation, like GM, Ford, Washington Mutual, Bank of America, etc.) go broke the taxpayers will be required to assume liability. This is called socializing the costs and losses. These continuing failures will add at least another 5 trillion dollars to the taxpayers' liabilities. Thats 23 trillion dollars. Private hedge funds hold something like 600 trillion dollars in paper profits. When these crash the taxpayers will be left holding the bag. So thats a total of something like 625 trillion dollars. The investors simply can not be allowed to bear these losses. They must be imposed upon the taxpayers. There are around 150 million taxpayers in this country. Call it 200 million taxpayers and 600 trillion dollars in liabilities for easy math. That works out to about $3 million dollars per taxpayers. I don't know about you, but this will certainly break me, because I've only got about $6 million in the bank. I'm going to have to severely limit my lifestyle.
-- EKATON --
Hyperinflation will make millionaires of us all.
That's right and gasoline will cost $5000 per gallon.
q
Hah! That's pretty good. I'm going to use that one.
Sounds like something I once heard about debt. Owe a few hundred k's and the bank owns you, owe a few million and you own the bank. Seems we can now add, owe a few hundred billion and you own the government.
This economic gerfuffle is going to make the Great Depression look like a boom.
toophat for you!
Well said.
Why are we not pissed at in-competence and lack of responsibility .
This country has gone too linient against business. Gone too far for business, which has pushed us for more productivity while they burn the gains.
We are in too deep to know what to do.
and toophat for you!
I can hardly stand this. These people are nothing but a bunch of crooks...where are our reps who will bring these criminals to justice?
Some of that money being squandered is going into our reps' pockets.
q
Too whoever said " capitalism when its profitable and socialism when its losses" and thats a direct quote from a poster here on CD....your statement is proving quite true.
I would like to know what the upper management types and CEO's are leaving with? How much do you get for being this bad at management?
The CEOs of the Fannies walked away with $23 million.
Oh good. That makes me feel better. I thought they might have to go without.........
GDBRSSGAMFSH! My form of profanity.
Too bad the government won't just seize their accounts and assets.
This is WHY nobody should be voting for McCain, Obama, Republicans or Democrats - do you finally get it? The idea is to break us completely so these fascists thugs can have what they want: more $$$ for their pockets, and total absolute power over everyone else on the planet. It is time to wake up!
The two guests on Democracy Now! this morning were brilliant in their analysis of this heinous crime that is being commited against all of us. NO BAILOUT!!! When will we wake up enough to take our world back from these monsters?? (and that includes Barack Obama, folks).
Welcome to the Third World.
Yesterday you had to be either a millionaire or a moron to vote for McCain/Palin.
Today you can only be a moron.
Why was Lehman allowed to fail while AIG's investors are rescued? Lehman's investors obviously don't have the right connections.
Remember trickle-down theory? We're seeing Reaganomics at its worst.
q
I feel sick to my stomach by the situation going on between Wall Street and the managers of our tax dollars. It is so brazen, but then everything this administration has done in the past 8 years has been brazen and without shame at all. I say: FOLLOW THE MONEY. Where are those billions from our tax coffers going? In whose pockets will the taxpayers' hard earned $$ go? FOLLOW THE MONEY.
Here in the real world, there are persons that I know who are behind on their credit card payments, their mortgage payments, their car payments, and their student loan payments. They get no relief, no safety net, no help at all from those "conservative" republicans who belief that hey, you made your bed, now you have to lie on it. But that doesn't seem to apply to the "big" players, to the tune of billions and billions of dollars because they must stay afloat or many more rich folks (but not nearly as many as us poor folks) will face financial trouble.
Here's the rub, the legislation that was put through giving corporations the same rights as a human being is being put to use. While the average American taxpayer helps this sick puppy, the corporation comes back as big and powerful as ever, and we the humans, are still working the two jobs, doing without and getting farther and farther behind.
This is not the real reason; but an excuse most people accept.
It was LB failure that led to AIG's problems. NOT! Both Guilty!
The first thing to do is cut taxes on the wealthy so that those managers and CEOS can keep more of their hard earned bonuses!
Welcome to the wonderful world of corporate feudalism (presaged brilliantly in the 1975 version of "Rollerball") where upper management are the nobility, tele-evangelists the Church, junior management the minor gentry, supervisors the knights, and the vast majority (workers and customers) are serfs. In this redux of medieval Europe, one law applies for masses and another applies for those whom have the "proper pedigree."
One of the characteristics of corporate feudalism is that the majority of the money flows to the those at the top of the pyramid no matter the instance: feudalism is not a meritocracy!
It is not a Government of the people. Recognize that. Its purpose is to preserve the wealth of the elite and to keep the unwashed masses in their place.
The Federal Government of the United States is merely a branch office of the Multi_nationals. The purpose of the Government is to collect tribute for those elite and convince those masses that it in their best interests.
The only difference between the two parties is the manner in which it is done. The Republicans are the slave owners that whip their property in order to get them to work harder. The Democrats feel they can get more work out of the slave by ensuring they are fed.
.
Oh the foreign element, the foreign element--are we bailing AIG out for our benefit or theirs, or fear of what the foreign element can and will do? You see, we're not getting the whole picture. Ironically, an ever growing number of us are cash strapped, so the fed will have to--more and more--borrow from Peter to pay Paul, until the whole house of cards finally collapses. Can anyone else see how hard these fools are scrambling now to prevent the truth from becoming so evident that even the most idiotic among us cannot deny it? They are DESPERATE. Stay tuned, it should get interesting, an enormous blow-back is brewing...
"The government CAN veto any dividend" - I'm a little bit offended by CAN. If it's our money we should OWN these companies.
I was struck by the story below this - "McCain would privative Social Security".
When I was young and broke on Monday.
Monday - Write a chech for $5.00 at the drug store.
Wednesday - Write a check for $10.00 at the drug store and deposit $5.00.
Friday - payday - cover the checks. Worked ALMOST all the time.
I should have been a banker.
Let's call it what it is, corporate welfare. There is no amount of public money or public trust that the wealthy and their enablers, Congress, will spare to save themselves. If we're bailing out the bankers then we are democratic socialists. We need to spread the socialism around and not just apply it to the rich. Let's forget this idea that we are capitalists, we are not.
Might want to stock up on some extra food and gas. Things will get ugly here fast. October Surprise! Bush can declare martial law for an economic collaps. Really.
Cheney has no intention of letting go.
I think people should think in terms of "bad winter coming".
Get some food stored up that could get you through to spring if it comes to that.
Make sure you are warm and secure in your home through the spring.
But don't "panic buy" anything, keep it cool.
Only good thing about living in south Florida, don't have to worry about the winter.
I've said it before; I'll say it again:
I think it's just wonderful that our enlightened government provides lavish social services in the form of safety nets for those who fall on hard times, and even those who brave hazards and risks to reach for extraordinary, spectacular short-term success and rewards!
"Those" meaning corporations and wealthy high-finance institutions and investors, of course!
I wonder if they've ever considered that sort of thing for ordinary struggling citizens? I know... that's crazy talk.
That's not crazy talk, Little Bro - that's COMMUNISM! The Sainted Ronald Reagan didn't deregulate corporate America and disable the government for you to seditiously bring up such pinko ideas!
No Republican policy in the last 50 years has improved the human condition in the USA.
The timing is interesting... surely ALL of these banks had problems before this particular moment. Seems like they're all lining up to get their FREE pass from Bush, in case Obama takes the office. It's plausible given the range and cost of these bail outs (all in fiat money! Face it, money itself is losing value as the sums can NEVER be repaid. It's like a game of monopoly that works so long as we're all willing to make trades, including that of our time, for these pieces of paper... as opposed to forming elaborate barter systems, a "separate financial reality.") that Obama would put at least SOME regulations back into place.
The End Timers see no problem with the big banks falling like drunken giants; nor with the ice caps melting; nor with war to determine who's God is the "right" one.. let us PRAY there are not enough of them to continue fueling the most grotesque policies of American history, both domestic & foreign.
The timing IS interesting. Is this Stage 1 of an October surprise: Create a general mood of impending doom. Stage 2: Create "an incident" or a resurgence of an existing problem: Iran, Georgia, Iraq, etc. (perhaps these were initially just trial balloons to see which would be most effective). Stage 3: Call off elections. Afterall, look at who the Repubs had as former and current nominees - literally a bunch of clowns. If I didn't know better, I'd think they really didn't intend to have an actual election.
Let them try it. I think people would finally rise up and throw off the mantle of such opression. If they really wanted revolution that would do it.
These creepy billionaires insisted on deregulation, because of course billionaires are more honest than regular folks like us. They don't need anyone watching them. Well, what they did was sell us a bunch of BS mortgages and a bunch of BS credit that would make the mafia blush. Then they did not keep their books very clean. They were taking money from overseas like the Bank of China, but the Chinese decided that they weren't going to do that anymore, because these sleazebags are not trustworthy. Well guess who jumped in to save these thugs? The government. Well, our government is so deeply in debt right now due to thug looting Bush that well our whole government will probably go bankrupt. Our government lives on loans too, and well, they are not trustworthy either. This should get real interesting when the great empire crashes in debt. I feel sorry for military folks. They will probably be left where they are. Too bad Pelosi didn't do her job and impeach Bush and try him for treason.
well well well
The republicans can not pin this on Clinton and democrats after all it was Mc Same's buddy to authored this bill to remove safeguards.
Hey who cares that the economy (once the most powerful in the world uptill 2000)
has gone to the dogs at least we are safe from terrorist.
So enjoy your saftey with an empty stomach and empty wallet
Vote McCain 2008 to complete the cycle
"The republicans can not pin this on Clinton and democrats..."
Oooh, you haven't been around here very long, have you? Just wait until the third party brigade arrives to tell us how Clinton and the Democrats are equally to blame, and only a vote for Nader can save us.
We have a winner!!!
progressiveparty wrote: "This is WHY nobody should be voting for McCain, Obama, Republicans or Democrats - do you finally get it? "
If Common Dreams posted an article about fluffy kittens, it would result in a number of posts like progressiveparty's.
Hey, wcdevins - Maybe we should have a contest to find the fastest time between an article/opinion piece appearing and a posting by one of these pod people.
Uh Oh....I already heard it (on TV, so you know its true) started under Carter!