WASHINGTON — Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.
The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.
Just yesterday I was glad that Sec’y Paulsen was apparently saying “no” to any further bailouts, now this. Is the US Gov’t going to wind up owning the whole financial sector? Probably not, just the liabilities.
I am so furious I could spit. :mad:
It’s just this type of wishy washy nonsense that has contributed to instability in the financial market. Either we bail out or we don’t. Frankly, bail outs do nothing to stop companies from making risky or shady deals. What’s the incentive for caution if the US Government will provide a bail out.
The people who run AIG should be fired and given no termination pay but the government could not let AIG go under any more than it could refuse to help people after a natural disaster like a storm or earth quake. If AIG had gone under it would have been catastrophic for financial markets all over the world. People who bought policies from AIG in good faith would have lost their investments. If they did their homework, they would have found that AIG was one of the top rated companies by A.M. Best, Fitch, Moody’s, Standard & Poor’s, and Weiss. In short as someone who has worked since I was 13, paid my taxes and saved for my retirement I am glad to see that my government is concerned about my investments. As I said the officers of the company should be fired and held responsible for the losses. They should lose their money, houses and cars if it can be proved that they are criminally liable. If AIG had gone under the top people would have suffered little if at all. They already got their millions in compensation. They would have just walked away very wealthy people and it would be the little investors who would be left holding the bag.
I’m no expert in any of this, but evidently AIG owns uncountable sums in mortgages or mortgage backed securities or derivatives of mortgage backed securities, and what the Fed is afraid of is a “fire sale” of those assets, some of which are doubtless perfectly good. Throw enough of anything on the market suddenly, and the price augers in. And so, the yields on those securities and discounted mortgages would go to what? 10%, 20%, 50%? Meanwhile, the actual, active mortgage market dies for inability to sell mortgages at rates that would attract any money at all, and every institutional investor in the country would spend the next year investigating and haggling over the corpse of AIG, and why? Because the discounted return on those “carrion” assets could far exceed anything they could possibly get from current borrowers. The corpses of FNMA and FHLMC would, of course, have been even bigger.
And, of course, foreign investors would be picking AIG’s bones too, and not be interested in buying anything “new” generated by American financial markets.
I was astonished this morning to hear from a local realtor that new home inventory in my town just went to zero yesterday, as the last “spec” house in town was sold. Existing housing sells pretty much as soon as it comes on the market. Nobody is building in the subdivisions at all. There are buyers, but no houses. Subdivisions are languishing because subdividers are in financial trouble themselves and nobody will lend them anything to build new housing because of lender fear. Everybody knows the market discounts construction and development loans on any bank’s books, and regulators now come down hard on banks with large construction and development portfolios, so bankers won’t touch them.
In a larger town nearby, the inventory is just about as flat. So one builder who has the ability to do it, is building 50 new houses, and having no trouble getting purchasers. Lenders are desperate to get the buyers’ loans, because they don’t have nearly the loan demand they once had.
Now, that’s not true everywhere. In nearby Northwest Arkansas, there are houses upon houses that sit unsold. Still plenty of sales, and lots of employment. The area is still expanding, but there are too many houses for the buyers to absorb, particularly those on the high end of the cost spectrum.
This really does, in a limited way, have a sort of 1930s aspect to it, in that anomalies abound. I remember my grandfather telling me, e.g., there was plenty of food back then, but farmers couldn’t sell a lot of it, and couldn’t get any kind of price on what they did sell. Meanwhile people went hungry and some starved, while farmers were shooting hogs and pouring milk out onto the ground.
Interestingly, around here, the demand is all in the $120,000 to $160,000 range for new houses. That’s about a 2000 square foot house, give or take, depending on how you build it. The “elephant houses” ($400,000 and up) are the only ones that absolutely won’t sell. But around here, nobody built any of those on “spec” anyway. Those are the ones people had custom built for themselves. In some places, those big houses were, indeed, built on “spec”, including many in NW Ark.
Sooooooooo, at least locally, one is disinclined to believe the recession is falling mainly on the shoulders of the “middle class”. At least not yet. People like to hoot at Bush or anyone else who says the economy is still basically sound. But it is. But, there still has to be an active mortgage market to enable people with jobs and down payments to buy those $120,000-$160,000 houses. And there have to be houses to buy.
One of the things, doubtless not the only thing, that is driving this is the intervention of funds whose sole purpose is to drive down whole sectors if possible, individual companies if they can’t drive down whole sectors.
It is interesting to look at what they are doing on the market when these “selloffs” are taking place. Their stock value and the number of shares sold goes up while something else is being driven down.
Those are the “public” ones. What none of us knows is how much of this is caused by the people who control the private funds, who drive “bubbles” up, then pop them, making money both on the way up and on the way down.
I’m not saying that’s all there is to what’s going on, but I know it’s a big part of it, because I can see the short sale pressures on particular stocks from time to time and the purchases of public “short sale companies”. They’ll “ripple through” a certain type of stock or cluster of companies, then abandon that pattern and go to another one. It doesn’t take a genius to see it.
There are unbelievable fortunes being made on all this chaos. Absolutely staggering fortunes. And the more they do this, the bigger and more powerful they get.
And if anybody is unaware that such predators are not influencing American politics and buying officeholders, they had better think again.
Let’s see, which private fund owner drove down the “Asian Tiger economies”, the British Pound and broke the Bank of England not so long ago, and also finances one of our presidential candidates?
Uh sometimes the government has to take measures to ward off a total collapse of the system. It should be determined on a case by case basis. When it bailed out Chrysler they managed to turn things around, albeit temporarily. The Feds didn’t need to do it the second time because in the open market a foreign company bought them instead.
What killed the economy in the 30s wasn’t the stock market crash but deflation. Everybody pulled their money out of banks and held onto it.
Since nobody was spending, prices fell, stores cut back inventory and orders, so factories laid people off . . .
So I’m wondering will we have deflation and inflation at the same time?
Right now banks have so much bad debt they don’t want to lend to anybody – this has to lead to business contracting, unemployment, &c. all of which is deflationary.
Otoh, Uncle Sam is printing money to “rescue” the finacial system which will drive the value of the dollar down, which is inflationary.