Since When Is Getting a Loan Being 'Bailed Out'?

We have all undoubtedly been affected by the recent New York Stock Exchange [NYSE] tumble. Whether it was a modest hit to our 401Ks, or a devastating blow to those who live off their stock investment earnings, the week of September 15th has been an especially tough one. However, here I am again defending the seemingly indefensible-at least in the eyes of the media. I do not really mind the recent Federal Reserve (Fed) decisions to “bail out” the latest financial institutions, in fact, I actually like it.

Before the pitch forks and flaming torches come for me, let me explain. Firstly, the main stream media needs to stop playing with words. Semantics are important. The phrase that has been used and abused throughout the television dial is “bail out”. Bailing out can have a variety of meanings. In golf, bailing out can mean to avoid the high risk shot and to instead play conservatively. In boating, bailing out means jettisoning water that has collected in a ship. At the county jail, bailing out means putting up the money so the alleged can be free until trial. The media seems to be categorizing these latest Fed decisions of provide loans to at-risk investment companies as bail outs. While, by definition, the word bail can be used for this action, it neither fully describes the real picture, nor inspires confidence in the government to do its job-ensure the health and welfare of its citizens. In fact, these types of negative excerpts actually hurt and undermine the good work the Fed is trying to do.

In the latest “bail out” agreement, the Fed has decided to allow American International Group (AIG) access to $85 Billion over a 24 month term at three month LIBOR plus 850 basis points. Good terms? Maybe when considering that the vast majority of banks would not touch the AIG issue, but hardly free money. Of course, this type of action by the Fed immediately becomes stump material for the presidential candidates across the country. I have recently heard phrases like corporate welfare and Wall Street over Main Street ad nauseam. Unfortunately, it seems that most folks feel that the Fed is giving away free money; just like a lot of Americans thought that it really was international supply and demand that drove up the Light Sweet Crude futures price, and thus pump prices, in the early summer.

Without getting into the intricacies of the quasi-governmental central banking system in the United States, it is the Fed’s mission to work this type of deal. In fact, it is critical that they do so. The domino effect of a failing interdependent financial cog could cause disastrous implications. Regarding the loan to AIG, citizens of the U.S., be happy that the Fed assisted with the support of AIG and the other crashing financial entities. Not only did they assist in securing the financial markets from further collapse, they actually put that “Fed tax”, i.e. the imposed discount rates on government money, coffers to good use.

Addressing the media, let’s take steps now to give the American people an accurate picture of what the Fed is doing. Instead of using terms that have negative connotation like bailing out, let’s express this situation for what it is. The Fed stepped in to provide AIG with a loan to cover their short term obligations while they rebuild their structure in order to deal with the fundamentally altered financial environment. That statement is by far a more accurate snapshot of the current situation; however, it will not fit into a blurb, so it is not likely to sell fear and panic, thus papers and air time.

Comments

[AlexS:]

The main stream media always plays with words, to emphasize the terrible, the surprising, the shocking. A lot of times they do it even if it's a lie. So the MSM coverage now is no surprise. Besides, most of them are for Obama so if they emphasize the negative now maybe people will be afraid and vote against the party associated with George Bush.

2008 Sep 18 12:46 PM

[buttonwwod1791:]

Good for you, at last a true assesment of exactly what is going on! No panic, No trying to read between the lines, just facts pure and simple. AIG needed a breather from this abject panic and my opinion will pay back this loan within the time period and move on. Anyone remember Chyrsler!

2008 Sep 18 12:49 PM

[sadecou:]

I realize that this is a loan but from what I read there is a warrant attached to it. Why have you not addressed that part? And, why is Liddy being considered as the new CEO of AIG. He has a terrible reputation at Allstate and if I were a policyholder, I would try to find a new insurance co ASAP.

2008 Sep 18 01:27 PM

[sadecou:]

I just went to the Federal Reserve Board's website. This is not just a mere loan but a loan with a warrant attached. You forgot the part where the US Government receives 79.9% Equity stake in AIG with the ability to veto common & preferred dividends.

www.federalreserve.gov...

What I want to know...why is it that the Fed Reserve Bank chose Liddy to be the CEO? I think there is something wrong with the Federal Government being a majority S/H in a private corporation. Just like Fannie Mae & Freddie Mac. And, what about the voice of the other S/H's? I guess they don't care that one of the worst CEOs of Allstate will now be CEO of AIG.

And, if I were a policy holder, I would pull my policy from AIG ASAP. You think it was hard to collect on a claim before? Wait until you try to collect on that same claim when Liddy becomes CEO! You might as well start a new savings account backed with gold... :)

2008 Sep 18 01:56 PM

[GaryD:]

Why don't you move to Cuba or Venezuela you goddam commie. They have lots of restrictions on the press there so you should like it. Sheesh.

2008 Sep 18 02:32 PM

[What A Farce:]

Ken and the rest of you, this aint know ordinary loan and its just as misleading to suggest that it is. Not too many loans that I know of that also entail an almost 80% ownership stake and a change in the board of directors.

2008 Sep 18 09:50 PM

[mathdummy:]

Yup, this is not a loan, this is a ROBBERY.

Imagine Buffet going to AIG with: I'll LEND you $85B, at libor+850, for 2 years. Oh, and besides the interest, I'll also take 79.9% of the company's ownership!!!

He would have been run out of the meeting tarred and feathered! Gee, wouldn't Paulson look good in tar and feathers?

2008 Sep 18 11:26 PM

[sumosama:]

VERY WELL DONE!!!

2008 Sep 19 11:17 AM

[notsosmart:]

its a bailout if the money is never recovered.is this possible? you say no?the taxpayer might say yes.yes,chrysler worked out well.if it had not who would mention it today.why millions of taxayers-of course.

2008 Sep 19 12:31 PM

[Strong Bad:]

Is it a bail-out? Yes. Is that a bad thing, no. When the bank failings that lead to the Great Depression came around, the head of the Fed at that time was a die-hard "free market" guy who didnt think it was the Government's role to intervene. We all saw how well that worked out didnt we?

2008 Sep 19 01:52 PM

[monday1929:]

Look up "free enterprise" in the dictionary. The banks are Bankrupt. Not a bailout? NOT A BAILOUT?
You know what, let's all say it was not a bailout. There there now. Everything is o.k. I do feel better now, thank you.

2008 Sep 19 04:47 PM

[Blue Water:]

So where are the AIG shareholders? This is indeed a loan and managements responsibility is to its shareholders. Therefore, they should be an up rising against this non bail out. It is a taking. Lets hear it from the sahreholders to take it back!!

2008 Sep 20 06:17 PM