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Bailouts for Everyone!

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September 16, 2008 – Comments (13)

I'm truly disgusted by what's going on at the Fed tonight. I don't believe for a second the BS about "protecting taxpayers" by providing a failing corporation with a taxpayer-funded "bridge" loan for more than twice the amount that AIG said it needed only days ago. With all the other "liquidity" out there available to banks, if AIG's collateral were believed to be any good, why wouldn't someone else -- or a group of someones -- stepped in to provide this financing?

And how on earth does a scheme which results in only an 80% stake in case of failure not constitute a bailout? If no one will loan AIG a penny, and it must be a taxpayer-funded bailout, then taxpayers should get 100% of everything in case of default.

Don't like the deal, AIG? Then walk and find some other suckers.

The Fed is flapping its lips about the need for an "orderly" unwinding of these assets, but now that everyone knows AIG is dead, who's going to step up and pay what the failed managers and government stooges believe the stuff to be worth? What we have here are sellers with zero bargaining power in a market full of panicked and ruthless buyers -- if any buyers can be found at all.

Unfortunately, the Federal Reserve Act gives Bernanke and his gaggle of enablers pretty much limitless power to put taxpayers on the hook for private companies' failings. All that's necessary is for them to tell us all that it's in our best interests to bail out the millionaire managers and the fake risk-taking investors.

They claim this particular bailout is authorized by Federal Reserve Act 13(3), which I quote below.

3. Discounts for Individuals, Partnerships, and Corporations

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.

Absolutely unreal.

13 Comments – Post Your Own

#1) On September 16, 2008 at 10:42 PM, StatsGeek (29.19) wrote:

It's a good thing this whole debt crisis is over now!  No more shoes will drop -- thank goodness!  Back up the truck and buy every bank stock you can get your hands on.  The bottom is in.  Lots of new jobs being created and household finances are looking solid.  Almost every stock index in the world has hit a new 52-week low.  Those charts are screaming, "Buy, buy, buy!"

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#2) On September 16, 2008 at 11:05 PM, Imperial1964 (97.77) wrote:

Seth, Is CAPS still doing 30-second videos?  I want to see you do your best Dr. Evil impersonation...

"85 billion dollars."

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#3) On September 16, 2008 at 11:35 PM, nuf2bdangrus (< 20) wrote:

Gee, I've had a tought time lately.  Think they'll bail me out?

 

PS  AIG turned down a private equity deal.  Shame on the Feds

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#4) On September 17, 2008 at 12:23 AM, TMFTomGardner (90.10) wrote:

Seth, I actually take the other side on this one. I think Paulson is doing a remarkable job of moving toward an orderly liquidation for firms like Fannie, Freddie and AIG. These are massive entities. Their chaotic destruction could roll into areas that might decimate unknowing counter parties. If before you make any transaction, you have to do background research into every financial aspect of a firm, the game of business grinds to a halt. Instead, what Paulson has done is to ensure that the equity runs toward zero, where it needs to be. In this respect, this is *not* a bailout. It is only a transition for customers/counter-parties in transactions. The shareholders are going home empty handed, as it should be. (Please do not read what Hank Greenberg has been saying about AIG being a "national asset, a national treasure, whose equity value should be protected by the nation". You'll get nauseous).

 But from my perspective, this was the right move. Protect those who deserve to be protected. Reduce fear in the marketplace. But sink the equity of the speculators. 

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#5) On September 17, 2008 at 12:33 AM, lquadland10 (< 20) wrote:

Bush SR. S&l Bail out  Bush JR. Housing banks insurance and what not I see a pattern they are all robbers.

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#6) On September 17, 2008 at 8:32 AM, TMFBent (99.81) wrote:

I disagree, Tom. Since when are bondholders all deserving of protection? Bonds are no more sacred than equity. They're risky, it's just that Bernanke and Paulson did absolutely nothing, for years, to understand what the real risks to "bonds" were.

Fannie and Freddie were obviously far too huge to let slide completely, but why shouldn't the bondholders out there have paid a bigger price for their unsound purchases? The only real answer there is because the Chinese and other Asian countries have a choke collar on Paulson, and let him know in no uncertain terms that their "investments" had to pay off. What we have there is the U.S. Treasury secretary putting U.S. taxpayers at the beck and call of a foreign (often hostile) government.

In general, bondholders don't deserve bailout any more than equity holders do, and if we swallow every single story they tell us about companies being "too big to fail," you're only cementing a perverse incentive for companies and their bondholders to take the biggest risks possible, to make sure the specter of failure is enough to put taxpayers on the hook for a bailout when the leverage hits the fan, as it always does.

Where does it end?

I don't believe the trumped up nightmare scenarios about chaotic unwinding, either. That's a story that cynical observers like Bill Gross -- who was speculating on GSE debt big time -- need everyone to believe in order that they have their positions covered by taxpayer funds.

Notice how the chaotic bubble didn't receive any attention whatsoever from front-line enablers like Bernanke or Paulson? Why do you suppose that is? I believe it's because there was "money" to be made for the folks they know, and this funny money profit-taking appealed to their world view that regulation should not impede capitalism.

Now, of course, when the well-connected out there (banks, PIMP, etc.) stand to lose on their bad bets, we're all told that the taxpayers need to foot the bill for a rescue, because the disorder on the way down would be bad for us.

This is no way to run an economy. It's inefficient. It's dishonest. It's corrupt. It ensures that capital is allocated toward enterprises with maximum risk, rather than those with maximum utility. It needs to stop.

Letting the vultures pick at Aug's carcass in a "disorderly" market would be a messy, but fair, principled and honest way to begin. I suppose I need to stop expecting that kind of thing from a government run by corporate lobbyists...

Anyone got a happy pill for me?

Sj

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#7) On September 17, 2008 at 11:21 AM, griderX (96.62) wrote:

Hands TMFBent  the bluepill. ;)

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#8) On September 17, 2008 at 11:26 AM, ByrneShill (74.27) wrote:

Where does it end?

Good question. Right now the yield on long-term GM senior notes is 17.72%. If the fed is to rescue the big 3 automakers when they're about to go bankrupt, why shouldn't I bet on such a bond? Cause a govt-backed 18% yield sounds pretty good to me. And since at this point, GM's survival is pretty much contingent on a govt bailout, the only thing to analyze is how likely are Paulson and Bernanke to bailout GM. So where does it ends?

Note that the same reasonning could apply to a bunch of badly-run companies.

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#9) On September 17, 2008 at 11:28 AM, ByrneShill (74.27) wrote:

Where does it end?

Good question. Right now the yield on long-term GM senior notes is 17.72%. If the fed is to rescue the big 3 automakers when they're about to go bankrupt, why shouldn't I bet on such a bond? Cause a govt-backed 18% yield sounds pretty good to me. And since at this point, GM's survival is pretty much contingent on a govt bailout, the only thing to analyze is how likely are Paulson and Bernanke to bailout GM. So where does it ends?

Note that the same reasonning could apply to a bunch of badly-run companies.

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#10) On September 17, 2008 at 8:27 PM, eldemonio (98.83) wrote:

Thank you sir, may I have another.  After looking out for my best interests, the Fed has left me with a swollen right testicle.

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#11) On September 17, 2008 at 8:33 PM, bostoncelitcs (37.13) wrote:

Ok...... ,who's been playing with the stock market?   It's all fun until somebody get's hurt.  Now apologize and say you're sorry.

 

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#12) On September 18, 2008 at 12:15 PM, XMFPhila100 (89.94) wrote:

Since when are bondholders all deserving of protection? Bonds are no more sacred than equity.

In terms of liquidation rights, obviously bondholders' claims are more sacred than equity holders. Also, a good chunk of the debt that was "saved" was owned by foreigners, particularly in FNM's case, China. Tough for Paulson to go to the next global economic conference without a bailout...

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#13) On September 29, 2008 at 10:15 AM, lonewulf47638 (45.37) wrote:

Another lie by Bush and rich banker are restocked for another scheme for turning over their proposed losses to gains. This is the worst deal in history. Home owners still must pay 600% mortages and will be forclosed while banh presidents plan the next sceme tomdefraus taxpayers.

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