Where Are the President and Congress in All This?

The Treasury announcement with respect to using the Fed and Section 13(3) of the Federal Reserve Act to bridge insurer AIG (AIG) is out. Here is the release:

Release Date: September 16, 2008
For release at 9:00 p.m. EDT

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under Section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance. 

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.  These assets include the stock of substantially all of the regulated subsidiaries.  The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholder.

While not unexpected, this is still staggering stuff. And there is lots to be worried about here, including what "collateralized" really means in such a fluid context, and why the U.S. has not been joined by the central banks of any other countries, but I'll save that for a subsequent post.

For now, I am more adamant than ever that the President and Congress need to get out in front of growing voter anger and confusion before it's too late. This, plus Lehman (LEH), Fannie/Freddie, and Bear Stearns needs to explained to people right now.

Comments

[Steven Hansen:]

what is the President supposed to do?? all he can do is veto laws. Congress is the problem. to date , it is the Fed and Treasury which are exercising powers that they really should not have to try to save a nation's economy. yes, you can throw some crap at the Fed and Treas - but they are in the line of fire and reacting.

now we need some proactive measures. let us begin by voting out each and every member of congress for not acting in March when it was indisputably obvious that the country was in trouble. and i do not consider a $600 payment to each taxpayer doing something.

2008 Sep 17 12:42 AM

[Undecided:]

Actually, if one really wants to understand what the President and Congress did and did not do, I have a link below that opened my eyes to the primary villains behind the bailouts today. I'm now actually pretty incensed at what I'm hearing out of Washington with all the blaming. Clearly, many of our large banking institutions don't know how to spell due diligence, but the lack of reform at Fannie Mae and Freddie Mac were the spoon that stirred the coffee. If we had seen reform years earlier we would very likely be looking at a different situation today. The link below is to an article I found today that actually referenced an earlier article from the Washington Post back in 2005. Check it out.

www.courant.com/news/o...

2008 Sep 17 12:53 AM

[MarvinMBA:]

This President is a lame duck and going to be walking the streets shortly....its too late for him to make any comment of value...the cat is out of the bag and the investors now hold an empty bag because of obvious mismanagement...too late to correct...it should have been done a few years ago. This shows how important it is to have the right administration running the country...not big business that comes out looking like somebody caught them with their pants down.

2008 Sep 17 01:02 AM

[debtacid:]

They are making political calculations and positioning themselves to deflect blame and offer self serving solutions. You had to ask?

2008 Sep 17 01:42 AM

[john s. gordon:]

where is the president ? chopping brush fat dumb & happy in crawford TX as usual.
> jack

2008 Sep 17 08:26 AM

[carey_jim:]

Where they have always been: In the pockets of Corporate America and in the thrall of Washington insiders.

2008 Sep 17 10:30 AM