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Congratulations, Bagholders...

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September 16, 2008 – Comments (12)

You now own 80% of a failed insurance business that the spineless Feds deemed too big to fail.

Fed to Give A.I.G. $85 Billion Loan and Take 80% Stake

I got the feathers. Anyone got a line on tar? Bernanke and Paulson need some work.

Sj

12 Comments – Post Your Own

#1) On September 16, 2008 at 7:40 PM, TMFBent (99.83) wrote:

But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.

The Fed didn't just abandon "precedent." The Fed sent a signal to everyone and anyone that the secret to survival is growing large enough and entangled enough that your demise will scare the politically-sensitive weathervanes in Washington.

Welcome to the new socialist state, everyone.

Sj

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#2) On September 16, 2008 at 7:56 PM, rd80 (98.66) wrote:

Not enough tar and feathers on the planet to cover everyone involved in this fiasco.

The cheap Spanish wine sounds like a great idea.  Think I'll go open a cheap Chilean cab sav.

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#3) On September 16, 2008 at 8:16 PM, jesusfreakinco (29.12) wrote:

Unbelievable.  I wonder what M3 is growing at, for real, in 2008 - 30, 40, 50%.  We are inflating our way to bankruptcy as a country...  The USD is DEAD, DEAD, DEAD.  The only thing we have going for us as a country is we have sold so many shares in our country (i.e. our currency) to bagholders throughout the world that they are afraid to sell any shares.  We live in interesting times...

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#4) On September 16, 2008 at 8:17 PM, Imperial1964 (97.93) wrote:

I can heat it up if someone pitches in for the tar.
All I have is some used oil.

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#5) On September 16, 2008 at 8:32 PM, martynanasi (98.62) wrote:

It seems that most of the FED actions these days are aimed at controlling the rate of delevering. Clearly an AIG dumping some of its assets on a wobbly market would just risk a spiral, where the cash raised is offset by further deterioration of assets. They are buying time so the rate of delevering isn't too steep. Makes complete sense. I do not completely understand why the moral hazard complaining, this isn't socialization of losses, one would hope the "bridge loan" is made good on. I think this is more akin to extending a lending facility access to the largest insurer in the world.

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#6) On September 16, 2008 at 8:51 PM, abitare (58.10) wrote:

Comrades,

Will we get free insurance with our "investment"? 

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#7) On September 16, 2008 at 9:20 PM, rd80 (98.66) wrote:

...one would hope the "bridge loan" is made good on...

I think we all hope for that.  But look at the whole picture.  Yesterday, AIG needed $40B and the NY regulator was going to allow them to get $20B from their own subsidiary balance sheets. So all they really needed to come up with was $20B.

Then today, it was $75B that GS, JPM and others were trying to put together.  Then tonight it's $85B.

If these assets are such great collateral, it begs the question why couldn't GS and JPM put the bridge loan deal together?  They certainly could have accessed the Fed window to raise the money, but then the banks who went to the window would have the risk.  If the collateral is so good, why did the gov't feel it was necessary to get warrants for 80% of AIG?

None of us here know for sure, but a very likely answer to those questions is that there's a substantial risk AIG won't be able to pay the money back and the collateral value is questionable. 

And we haven't even arrived at the question of where in the US Constitution we find the authority for this.  News reports say Bernanke and Paulson met with some key congresscritters, but those reports are silent on the authority that gives the Fed the basis to do this. I guess the Federal Reserve can pretty much do as they please.

This may be better than letting AIG fail, but it's a horrible precedent and it doesn't guarantee AIG's survival.  At least with FNM and FRE there was a gov't sponsored charter and legislation to give some rationale for the gov't to get involved.

Marty - just checked your profile - "Mark to the market pricing will hurt."  Bullseye.

 

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#8) On September 16, 2008 at 9:47 PM, StatsGeek (29.53) wrote:

I predicted this course of action earlier today in my blog.  It's just incredible to me that foreign owners of treasury bonds aren't abandoning them like used condoms. And the markets are all trading up on this news.  Did anyone really expect our government to let LEH x 10 occur?

Investors keep focusing on the latest shoe to drop.  Once that shoe is done dropping, they assume there will be no more shoes to drop.  It's just incredible to me.

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#9) On September 16, 2008 at 10:05 PM, TMFBent (99.83) wrote:

Pretty good crystal ball there, Stats.

My issue is that this doesn't really eliminate moral hazard, because this is a complete bailout for bondholders, including creeps like Bill Gross who buy this junk then go on TV spouting about how the nation must bail out these institutions -- so that his bonds don't have to take a haircut, of course.

They only mostly killed equity, but until they're willing to make bondholders take some pain too, they're doing too little to eliminate moral hazard. They're just choosing to protect giant, entrenched investment interests instead of equities, which can be purchased by humble bagholders like us.

It's really getting to be torches 'n' pitchforks time.

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#10) On September 16, 2008 at 10:12 PM, StatsGeek (29.53) wrote:

I'm getting really Fed up myself, Bent (pun intended).  Combine all the government meddling in our supposedly free markets with hedge fund unwinding and you have a market that has no rhyme  or reason.

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#11) On September 16, 2008 at 10:38 PM, rd80 (98.66) wrote:

Might as well correct my mistake here as well.

Here's the Fed news release

I was wrong, the Fed does have the authority under section 13(3) of the Federal Reserve Act to take this type of action.  Bent also noted the authority here.

Apparently the rules are whatever 5 members of the Fed Board of Governers say they are. 

 

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#12) On September 17, 2008 at 3:11 PM, russiangambit (29.49) wrote:

>  It's just incredible to me that foreign owners of treasury bonds aren't abandoning them like used condoms. And the markets are all trading up on this news. 

There is more than meets the eye. Do you know that russian banks are in liquidity crisis? People say it is political instability. I say, it is expected meltdown in the values of the US bonds their are holding. Russia is one of major holders of the US debt. When Russia was politically stable last time anyway?

Another debt holders are China and Japan. In case of China, government controls these holdings, so they are not selling. Not sure about Japan.

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