But does it make it even worse to pick up a huge insurance conglomerate right after a couple of hurricanes caused billions in damages?

Who cares about AIG and hurricans when when terrorists have just blown up our Yemen embassy? Where are red staters’ priorities?

Who cares about AIG and hurricanes when terrorists have just blown up our embassy in Yemen and killed our real heroes?

… that my first and best source of financial news and insight is Red State? Thanks again for some of the best reporting and analysis that I can find anywhere.

Now we just have to make sure that we keep an eye on this, to make sure AIG is indeed unwound correctly. And which POTUS candidate is more likely to do what’s needed and to hire people who can do it right? I noticed that Mr. Hope-and-change is still mostly reporting the gross take, and doesn’t seem to be using the money all that well. Given his complete lack of economic experience otherwise, it’s not a good data point.

Check out this article via The American Thinker:

http://directorblue.blogspot.com/2008/09/jamie-gorelick-mistress-of-disaster.html

The Democrat who insisted on limiting information among law enforcement agencies under Clinton, and unthinkingly thereby helping to create conditions favorable for 9/11, is apparently also involved in creating conditions for today’s financial problems.

I expect this from socialists and democrats, but where in the hell is McCain and Company blasting this?? I am so frustrated I could almost stay home this Nov 4th. What is the difference really, between McCain and Obama? Both slam Wall Street. You think the FED will bailout my business???

Blackhead, your message was very well conveyed. After sleeping on this through the night, I now agree with your summation of this issue. It was probably a necessary move.

However, the problem is that it is not going to stop here. I predict within weeks (prior to the election, of course) we are going to see a $50 billion bailout of the U.S. auto industry. Then the government is in the housing (fannie & freddie) business, the insurance business, & then the automobile industry. Where does it stop? We can’t find the bottom of this economic downturn (probably soon to be a true recession) and begin recovery, if they continue to artificially prop it up.

People are angry because they see Washington working behind the scenes, but at the same time people wish to see some leadership out of Washington. Remember a very large part of our population have never experienced a hard economic recession and many that have don’t remember.

Lawmakers need to:

1. Come out and say this is the problem, we know it exists. First and foremost is that we need you to remain calm. They need to tell people that it took about 10 years to get in this trouble and this will not be fixed in a few days, but we are working on it for you.

2. Here is our plan for ending this situation. The plan must be more than simply bailouts (no I am not saying we need individual handouts, either). Lowering enery prices, stabilizing housing, etc. is what is greatly needed now.

3. Here is our plan for not letting this happen again.

4. Continually update the progress to keep people calm and the markets moving towards stability.

Again, it is time for those in Washington to step-up and show some leadership in these issues. A little leadership (true leadership, not rhetoric) might just begin to stabilize the U.S. economy. And until our economy begins to recover, the world economy has no hope of recovery.

We’ll see if this works, and we’ll see if the government decides to try to run this company forever. Only time will tell.

Crisis

http://hotair.com/archives/2008/09/17/mccain-ad-foundation/

To compare the fallout of a possible AIG bankruptcy filing to a bail out for U.S. automakers shows a fundamental misunderstanding of the Global nature of the original problem that got the Fed involved in the first place.

I admit, it’s not hard to confuse an economic amateur like me but please help this average Joe understand.

AIG gets a credit line of $85 Bil. but you speculate that they won’t use it. If they don’t use it, how does the gov’t end up owning 79% of the company?

The root of this crisis started under the Clinton administration. Henry Cisneros and Andrew Cuomo were tasked with expanding HUD, expanding ‘home ownership’ and removing oversight.

To expand home ownership, HUD pushed for more targeted loans to unqualified borrowers — sub prime loans.

The basic laws of supply and demand reacted as they should: when demand increases, prices increase. An artificial housing boom was underway.

Red flags were swept away by heavy lobbying from the real estate and financing lobbies.

When Bush replaced Clinton he had financial and political time bomb on his hands. Any attempts to reign in the unsound practices of HUD would have been trashed as racist.

Now everyone knows the result… the government take over of Freddie, Fannie, AIG, and host of others still come.

Sadly, major financial problems in this country are no longer met with free market corrections, but instead with an expansion of the federal government.(Depression and FDR).

Will someone in government have the fortitude to call for the complete break up of companies before they become a permanent, menacing appendage of Fedzilla?

Is this what we should hope for? Or would a complete meltdown of the U.S. government and the economy finally cleanse this nation of the stupidity of socialism.

Although I am no fan of Clinton, I think it’s reasonable to state that this is merely the culmination of a bad idea that started many, many years ago. When Fannie and Freddie were formed by the federal government their intent was to boost home ownership.

The Democrats have always pushed for increased home ownership to help people and Republicans have pushed it for its social stability. Either way, a moral hazard was created and we have been slowly changing the rules and adding new financial instruments (Mortgage backed securities, etc.) which only add to the complexity and pain when the inevitable result occurs.

What needs to happen is to wipe out most of these firms, revalue housing (probably way below where it is today), and rethink how the government meddles in the market. Unfortunately, everything melts down at once leaving no time for an orderly ‘withdrawl’ so we need bridge loans, etc.

I hope Bush doesn’t get equated with Hoover. But that may be the path we’re on.

Not exactly a classic bailout.

Thanks for the timely analysis, blackhedd.

You are so good at objectively stating what is going on.

But after reading a large number of your blogs, I’d really like to see the emotion behind it all. Do you follow mbecker’s projectile vomiting desire? Do you lose hope in the conservative voice in fiscal policy? Or do you think steps like this are inevitable and our philosophical beliefs are sometimes impractical?

You say the Fed must liquidate AIG, but why cannot they just sell what ever is left of the company after the 24 months are up? There should be some value there by then.

like many others at this site, I look for and read blackhedd’s posting of the financial world. Thanks-

I’m not angry about executives making money or losing it for that matter. I suspect they’ll all be able to pay their heating bills this winter.

My anger is over the fact that the government now decides what businesses sink or swim. The concept of survival of the fittest where the smartest, most innovative companies survived is gone. The ideal that we are all on equal competitive ground is destroyed. The government has chosen to give companies distinct advantages over one another. Their monumnentally bad risks have now been covered by the taxpayer.

But ultimately I’m mad that this trend will continue. We see it in the home ownership market where people who signed bad loans want the government to fix it. Now companies and investors are doing the same. We’ve essentially told the world that if you take some bad risks, we’ll throw out a net to save you. Paid for in part by those who chose to play it smart.

It’s people who played it smart, played by the rules, quantified their risks having to bailout those who didn’t. Those who made tons of money on a system that now they feel needs to be saved by others.

I completely understand their decision. I know it saved us some massive problems. But let me know where I can sign up my company for billions of dollars in loans. It’s a better deal too, my company actually made money this year.

I keep hearing about how AIG has a trillion dollar in assets and all these profitible elements to the company.

My question is why didn’t they sell some of these assets for cash? They had to know that they were in trouble for awhile now.

Didn’t Elliot Spitzer use a bunch of unproven accusations to get Hank Greenberg forced out of AIG? Could Hank Greenberg have prevented this fiasco? If yes, then Spitzer’s role should be blasted on the front page of every newspaper.

Excellent level-headed post Blackhedd. Charles_Beauchamp also laid out an excellent set of steps for tackling the problem.

It was a beautiful day today, and I too had much anger. This is starting to smell like socialism. I do understand why the bailout was needed, but I am not happy about it. I don’t think it is for us as much as it was to calm world markets and also convince countries like China that we are still a good investment. At the rate we spend money, we still need an influx to underwrite our debt.

Unfortunately, this is a mess like one we haven’t seen in a very long time. The fundamentals are very bad. Americans don’t save enough money. I heard some reporter saying that the current crisis would be toughest on those on Wall street and wouldn’t affect average Americans as long as they’ve been “living within their means”. But seriously, how many Americans are living in their means? That’s how we got into this one.

We need to save, we need to invest. We need to quit selling our companies to foreign corporations and maintain both working capital and the means of investment here. We need to tell our government that we’re not going to spend money we don’t have. Congress should start looking at their books the same businesses look at theirs’. It’s all about return on investment. If you’re not getting good ROI on a budget item, CUT IT. If you are getting good return, consider whether you can get a better return by investing more. Or, consider if you can get a better ROI by investing less and streamlining. Make some goals and put them on paper.

This is going to be a long, tough road, and there’s no doubt we can do it.

80% is the magic number. If the Fed took 80%, then the US government would have to put AIG on its books. This is a convenient way to allow the government to say that it didn’t just buy AIG, when really it just bought AIG. Any other time another entity or company buys a controlling stake (could be 51%, could be less), we call it a “hostile takeover”, and as Charles said, they bend you over.

By taking 79.9%, the Fed can keep the AIG loan off the government’s books. It’s creative accounting, that’s all. In my opinion, no different than a lot of creating accounting that some on Wall St. have used to cook books in the past (it reminds me of “pro forma” earnings statements, where you claim a huge profit but exclude a lot of debt and write-downs)

The Fed probably didn’t buy actual shares of AIG but rather probably bought warrants, which are like options to buy. From AIG’s point of view, same thing. They’re over a barrel.

80% is the magic number. If the Fed took 80%, then the US government would have to put AIG on its books. This is a convenient way to allow the government to say that it didn’t just buy AIG, when really it just bought AIG. Any other time another entity or company buys a controlling stake (could be 51%, could be less), we call it a “hostile takeover”, and as Charles said, they bend you over.

By taking 79.9%, the Fed can keep the AIG loan off the government’s books. It’s creative accounting, that’s all. In my opinion, no different than a lot of creating accounting that some on Wall St. have used to cook books in the past (it reminds me of “pro forma” earnings statements, where you claim a huge profit but exclude a lot of debt and write-downs)

The Fed probably didn’t buy actual shares of AIG but rather probably bought warrants, which are like options to buy. From AIG’s point of view, same thing. They’re over a barrel.

(This is a reply to sturner, above.)

Many, perhaps most, financial assets (except for US Treasury securities) are generally quite illiquid. You buy them not with the intent of trading them, but of holding them till they mature.

Massive sales of illiquid assets could only be done at huge losses. And that’s in normal times. Now, with markets under extreme stress, it would have been a fire sale.

And I’ve detailed elsewhere how a fire sale of illiquid assets by one firm would cause literally every other institution in the world to take losses to capital. That’s the systemic risk that caused the Fed to prevent AIG from going to the wall.