AIG Bailout: Over to Congress 22 comments
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Take your second deep breath of the week. We are at a cusp tonight, with a Treasury deal allegedly on the table to provide a $85b bridge loan to doombound insurance company AIG (AIG). The deal would apparently include warrants to the government, and heavy incentives to disgorge AIG's many assets quickly in a kind of low-grade fire sale.
It seems clear that were that not to happen tonight then AIG would file for bankruptcy tomorrow, and that would have immense and unknowable consequences. While that does not make an AIG bailout required, it is also true that chemistry experiments with unknown outcomes should be done on small scale and at home, not in global capital markets during a crisis.
The main risks tonight are political, not economic, however. Congress is frustrated at feeling like it is playing from behind in this debacle, and in an election year with massive financial commitments being made -- Bear Stearns plus Fannie/Freddie plus A.I.G. plus, plus -- and with an angry electorate having had this ill-explained to them, we are at an incredibly risky moment along multiple dimensions.
I wish people would shut up about "moral hazard". Yes, bridging AIG through its current crisis is not something you want to do; and yes, it would be better if the market solved its own problem. But even a cursory analysts of the serpentine connections between AIG and capital markets tells you that the latter just can't happen, so you have to hold your nose, be an adult, and live with the former.
Moral hazard, while real sometimes and in some places, is vastly overrated as an effect. Granted, it's seductive in the same way that risk homeostasis is -- the notion that, for example, people drive faster and take more risks because they have seatbelts -- but like risk homeostasis, moral hazard is vastly over-diagnosed. People at major financial services outfits don't project five years into the future and say, "Lever up, boys and girls. We'll either make a lot of money now, or be bailed out later." Real people in real markets don't think that way. Matter of fact, if anything, they're short-sighted in that regard to a fault.
Further, imagining that people load up with "end of the world" liabilities in an effort to be anointed with "too big to fail" status is muddled non-thinking from run-amok conspiracy theorists. They would be better off sticking to, you know, perhaps denying the Apollo moon landings. Because the idea that a GM (GM) can now credibly post-AIG make the case that capital markets will blow up if we don't assist it too is silly -- and suggesting that auto companies (just to pick an example) will now plaster themselves with leverage bombs to make their own "We're dangerous too!!" case stronger is sillier still.
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This article has 22 comments:
All right, I've had it! Everyone keeps talking about "the fed" and "the government" like it is some 3rd party. The government is US, it's you and me. It's our retirement, our future, our children's future, our current and future economy, belonging to "we the people of the United States of America" !
Why do "we the people" truly need to spend our hard earned dollars to bail out a company that has made poor decisions with its investments and risks? Since when did this become the job of "we the people"?
Yes, AIG has far reaching tendrils in economies around the world, however, each investor, each country, each individual, each business took a risk when they invested with this company and the investments they have made.
Is "the government" going to pay the individual investors who have lost money on our retirement accounts, our personal savings? No I don't think so. Investment in anything other than a bank involves risk.
If "we the people" continue to bail out corporations who make decisions to hedge themselves in risky and marginal areas we are on our way to a different kind of America. The kind of America where big business is rewarded for bad business decisions because their "tendrils" extend so far.
America needs to focus on bringing in industry and alternative energy and creating an economy that works for "the people" who live and work here in the United States.
The Constitution does not call for the bail out of "corporate entities" this is an outrage! This the absolute slap in the face to those of us who faithfully pay our taxes- to bail out an insurance company with MY MONEY - SHAME ON US, EVERY ONE OF US! We are "the fed" Let everyone know if you are as outraged as I am. This is not what my tax dollars are for!
The 80% warrants should mean there are now around 13.5 B shares outstanding.
All the details are not out yet, but if the above is true, then it would seem AIG common should still trade tomorrow at around $2 (plus or minus 50 cents)
No, sir. You meant be a coward. Be a child caught with one hand in the cookie jar and the other in his pants. You mean complexity is too much for "markets" to cope with, but government can? Sigh... F
Details are still a murky ,but why is it that the common shareholders are always victimized in the process of "solution" .
They were not speculators originally ,but investors prodded by the rating agencies and institutions to buy the blue chip issues and take a long term investment horizon.Now they are called speculators-right.
AIG has significant assets .Now the FED had providede AIG with liquidity -not bad .
This is socialism that even FDR could not have conceived.
I look at it the same as writing unsecured puts, no matter how remote the chance there's still the possibility you end up with stock you don't want at a price higher than you can afford. Lesson is don't write something you can't back up. If AIG can't back up the CDS's that were written then they should be left on there own to sort it out.
If other companies suffer from contracts they wrote and get exercised because of it, let them all fall apart. There's nothing backstopping the individual if they make bad calls, what makes a multi-national any different?
The 24 month loan is at LIBOR + 850 basis points, so with its new management, AIG will have a huge incentive to sell everything as quickly as they can to pay off the loan. I believe the terms of the loan are more of a political play to make this seem less like a bailout.
against losses for its clients. Why should the US Government be exempted? The same players who told us securitization was good are now telling us of the dire consequences if we don't bail out the systems failures. Why should we believe the?
As others have said, I don't think we would want to wake up tomorrow morning in a world where AIG had collapsed. I was in favour of letting Lehman go - mostly because the Fed had to prove a point. I don't see the AIG backstop as contradicting that premise. There are some institutions that have such an insane amount of counterparties, and so much stuff on their books that they can't be allowed to fail
The truth is that shareholders DO deserve to get wiped out - if you invest in a bad company with bad management, that's your fault and your problem. The people that deserve to be saved (and the ones for whose sake this bailout is happening) are the related counterparties. These aren't people who invested in AIG, these are people who had indirect dealings with them. Yes, it's prudent to have some kind of cap on maximum exposure to a particular counterparty, but when something is as huge as AIG it's pretty impossible not to have an inter-dependence with it. For example, if Microsoft ceased to exist tomorrow (and I'm not saying it will) what in the world would everyone do? would it be your fault for backing a bad horse? not really, you just used the standard that probably 90+ percent of the world runs on.
Also, when you start looking at naked puts etc, yes it's your problem. you're the nut who took on unlimited risk. However, with exchange traded options, there is a clearing house which insures the transactions and which should maintain stability if someone defaults. When you're looking at OTC credit swaps, that becomes much more complicated.
I just re-read my post and realized that paragraph made no sense...
Why the US tax payer should be stuck with a worthless IOU?
Like David Letterman, here is my top ten list.
1. Convert your money to another currency. Owning U.S. money is like owning stock. If the U.S. is full of shit, then change toilet paper brands. The massive deflation of printing funny money to AIG is only going to weaken your dollar. A two dollar loaf of bread will become four or more. Change your money to buy bread in the future. Push to remove penalties and charges for changing U.S. dollars into other monies or standards like gold.
2. Write your congressman. Find their damn home number and call them at all hours of the night. Break apart the lobby system. Find out who is lobbying, and screwing up your life and never purchase from them again. Tell all of your friends to do the same.
3. Try to set up a system where the people's vote usurps Congressional power like in state governments. We the people can amend amendments all the time at the state level. How many signatures does it take to undo the Congressional approval of AIG.
4. Remember this day, and engrain it in your mind. Never, ever invest in the stockmarket or America again. Allow the stock market to truly crash so that even the government cannot bail out the bullshit. Last time I checked people learn best through pain and suffering.
5. Act quickly because the world is poised to screw over us American's, and they will soon be flooding us will all of our worthless dollars. Prepare for Sith invasion.
6. Fix the Glass-Steagall act A.S.A.P. This repeal allowed banks to mix hedge funds with commercial or simply risk markets with solid investments. Banks never go under in any economy if their simply commercial. Of course they don't make great profits either. The great depressions taught us this lesson and set the Glass-Steagall act up. The republicans, and the democrats for that matter overturned this wise approach in 1999.
7. The entire republican party has to be destroyed politically because they are the worst, and you need to watch the democrats and any new formation of parties until you can transition to a truly independent party. Simply choose someone off of the street. These people could not do as much damage as party politics.
8. Do not forget to break apart the monopolistic system. 50 seperate entities should be a good number. Microsoft is the only operating system for P.C. break the sucker up. Boeing and a few other national security and airline groups need to be broken up as well. Auto industries should be cracked to pieces. Banks should really be broken up and not be able to centralize over state boundaries like we had before. The Time Warner media giant that went untouched in its merger needs to fall. Smaller companies like Dentsply that control most tooth implantation are wrong. Do your part and ask where your money is going and support the smaller businesses until we get a congress that breaks up monopolies.
9. Make every aspect of what we pay for in the government open to the public. Finances, time, etc. need to be available at the click of a mouse, and there is always someone board enough to check their records.
10. If all else fails, leave the country. Many people on these blog sites will tout you to just get the hell out. Leave the ignorant behind, and take your skilled labor elsewhere. When they cart America off to the auction block, you can come back and buy all that you lost.