Fed Gives AIG an $85 Billion Loan in Exchange for 80% Stake

As noted in an update to the post below this one, the Fed is going to give AIG an $85 billion loan in exchange for an 80% stake in the company:

Fed Readies A.I.G. Loan of $85 Billion for an 80% Stake, NYT: In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

In return, the Fed will receive warrants, which give it an ownership stake. All of A.I.G.’s assets will be pledged to secure the loan, these people said. ...

So you as a taxpayer now have a large stake in AIG.

Update: Paul Kedrosky:

IG, Risk Homeostasis, Moral Non-Hazard and Apollo Landings: 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 analysis 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 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.

More: Why Bail Out AIG's Bondholders? -Felix Salmon. Calculated Risk risk reports: Fed: AIG Deal Done.

Update: John Jansen isn't happy with the Fed:

Thoughts on A Loan to AIG, by John Jansen: Let me begin by noting that no details have been released on the alleged transaction between the Federal Reserve and AIG and so to comment is dangerous. But I will anyway!

If the Federal Reserve Bank of New York plans to write an $85 billion check to AIG , then Treasury market participants should duck for cover. They will likely raise the money by selling Treasury debt from the System Open Market Account. I have no idea how they would do that but it would be the largest such sale of securities since the dawn of human history.

At this point I run into a problem as I lack a detailed set of facts. I will offer some comment but I understand that I am on rough terrain. Why does the Federal Reserve not control 100 percent of the company? Capitalsim punishes bad risk. These jokers took bad risk in spades, They should be wiped out. The common shareholders should be left with nothing. If this was a good deal for the taxpayers, this would have been a private transaction. The very fact that the Fed is involved speaks loudly to us that no private company believes that this is a prudent loan.

Preferred shareholders? If the deal calls for making them whole, I ask why. There does not seem to be any reason to bail them out.

Bondholders? They should be forced to take a haircut. This is not FNMA or Freddie Mac issuing debt for 40 years with a wink from the Treasury Secretary and the implied backing of the Government. This was a completely private enterprise. AIG debt could have been purchased earlier today for cents on the dollar. To reward the holders of that debt truly creates a windfall profit.

The Federal Reserve is careening down a very slippery slope. The risks of that joyride are understandable and worthwhile if they exact a financial pound of flesh from those at AIG who so bungled their mission. On the surface that does not appear to be the case here.

Update: Was it legal?:

Fed Invokes ‘Unusual and Exigent’ Clause — Again, by David Wessel, RTE: In lending up to $85 billion at a hefty interest rate – LIBOR plus 8.5 percentage points – to insurer AIG, the Federal Reserve once again relied on its rarely used legal authority under Section 13(3) of the Federal Reserve Act to lend to “any individual, partnership or corporation” in “unusual and exigent circumstance” provided the borrower “is unable to secure adequate credit accommodations from other banking institutions.”

Until its loan to then-ailing investment bank Bear Stearns in March, the Fed hadn’t used that lending authority since the Great Depression, lending exclusively to commercial banks and other deposit-taking institutions. The relied on a different section of the Federal Reserve Act to offer loans – which weren’t actually made – to government-sponsored mortgage giants Fannie Mae and Freddie Mac. ...

In a Tuesday night statement, the Fed said, “The (Federal Reserve) 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.” [Note: the term of the loan is 24 months, and "is collateralized by all the assets of AIG and its subsidiaries."]

Update: Tyler Cowen examines some of the Fed's new properties:

The Federal Reserve now has commercials: Really. View it here.  This one is even better. Here is the Fed on risk protection.  And here: "The Greatest Risk is Not Taking One."  Here is Fed Karaoke.

Comments

[RW]

Am I the only one who thinks Paul Kedrosky's article was a tissue of straw men, unsupported assertions, false analogies and non sequiturs? Just asking.

[Frank Gifford]

Further proof, as if we needed any, that the Reagan revolution was nothing more than smoke and mirrors. The Republican Party has wrecked America.

[Jim Harrison]

I don't know if it falls under the rubric of moral hazard, but the bailout does mean that the Feds will now decide which businessmen will retain their wealth and which will be personally ruined on an ad hoc basis. I don't think that the decision on AIG was made for corrupt or political reasons, even though AIG is much better connected with the Republicans than Lehman was, but it beats me why the world and the American public shouldn't draw that conclusion or why we should think that future bail outs won't be political favors or simply go to the highest bidder since there is zero personal accountability.

[Bruce Wilder]

RW: "Am I the only one who thinks Paul Kedrosky's article was a tissue of straw men, unsupported assertions, false analogies and non sequiturs?"

Oh, I don't know. I love being told that I'm a conspiracy theorist. Almost as good as being dismissed as a political partisan.

[Tim G]

i missed where you explain why this is a good idea? and yes, paul's article was a joke.

[Keep reading - there are several posts explaining this - you can't miss it, or I guess you can - MT]

[bakho]

This "crisis" is all about wealthy special interests who have lost a lot of money. The bookkeeping is so shoddy that no one knows who owes what. Probably, a lot of wealthy people owe themselves money. As long as these bailouts are paid for by the wealthy the rest of us can live with their immoral hazards.

Money subtracted from the treasury should be replaced by a tax on CEO salaries of at least 50%, a tax on golden parachutes of at least 50 % (yes that means $10 million from Carly Fiorina) a transaction tax on financial transactions and an increase in the capital gains tax. And yes, the taxes should be retroactive. There is nothing like accountability to prevent future problems.

[Bruce Wilder]

bakho: "Money subtracted from the treasury should be replaced by a tax on CEO salaries of at least 50%, a tax on golden parachutes of at least 50 % (yes that means $10 million from Carly Fiorina) a transaction tax on financial transactions and an increase in the capital gains tax. And yes, the taxes should be retroactive."

I'd really like to see these kinds of proposals from our self-appointed liberal economists, like Larry Summers or Alan Blinder. The 1% should be paying for this.

[dd]

"Probably, a lot of wealthy people owe themselves money."

Derivatives are like that; but not only do they owe themselves money, they've also leveraged the debt asset to buy more liabilities they owe themselves.

[david]

Fiorina owes a lot more than that. How about her bonus for completing the Compaq merger?

Moral hazard may be overdiagnosed (almost as often as ""unintended consequences"are reactionarily invoked), but nothing compares to the invocation of the market as problem solver, if it only weren't for those meddling bureaucrats.

[dd]

GM, GE, Ford and many other vendor financing corporations already have plenty of nuclear leverage. They too will need assistance.

says...

What planet is Paul Kedrosky from ? What the hell does he think led to AIG needing a bailout.

Moral hazard. A criminally negligent, radical administration that should be impeached for dereliction of duty, a super majority of republican wing nuts in Congress, the absolute failure of academia to correctly interpret the economic and trade policies, and a financial and banking industries that have been allowed to operate like the Cosa Nostra.

Sheesh!

[cb]

• Sep 16 08:54 PM
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!

[donna]

Unbefrickinlievable.

When do they nationalize my local pizza parlor?

This is just getting ridiculous now.

[dd]

Our future was present future valued and derivatively accounted for in the now past profits that supported all manner of then current management compensation. The now now has no profits or capital as it was disbursed in the past. Space Balls summed it up the best: "When will then be now? Soon sir." And so here we are in the now now or as Rummy would call it the known unknown or future predicted collapse.

[dd]

The future is best summed up in this present event:
Reserve Primary Money Fund Falls Below $1 a Share
Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aycQDd9pEdCA&refer=home

[anne]

Paul Kedrosky is right, the Federal Reserve is right.

[Friedrich von Blowhard]

Moral hazard, as described by Mr. Kedrosky, may or may not be a huge problem. It is, of course, a subset of a really big, serious problem: captured regulators. Perhaps Mr. Kedrosky should remember that this set of governmental 'interventions' in the capital markets is essential to maintaining the value of the jobs and the franchises of the financial services industry, which over the past few decades has been overwhelmingly the most profitable and highly compensated sector of the economy, and which also recycles more cash back to the government in the form of campaign contributions and lobbying expenses than any other industry in the U.S. Many of the problems that are blowing up in our faces today exist chiefly because fixing them would have made Wall Street less profitable, and that consideration seems to have weighed quite heavily with the regulators at the Fed and SEC, likewise with their congressional and presidential overlords.
Wall Street didn't want to see any regulation of derivatives or permit credit default swaps to move from the highly profitable OTC markets to a less-profitable regulated exchange. Of course, now it is these peerless products of financial innovation that are driving the Fed's interventions--Bear was too big a writer of CDs to be let go, and AIG is bigger still, etc., etc.

What's so disturbing about all of this is the way in which the larger questions continue to be evaded. For example, why are we working so hard to bail out a financial system that did a piss poor job of financial intermediation, wildly misallocating vast amounts of credit over the past decade? (This has resulted in very poor, low economic growth...a cost that should probably be hung on moral hazard and captured regulation.) How can we be assured that this incredibly bad performance of the financial sector won't happen again? Does Mr. Kedrosky care about questions like this or is he still too worried about the salaries, bonuses and stock prices of the misallocators? Since the Fed sat back and did nothing while the misallocation was in full swing, why is its utter failure as a regulator...or, perhaps its utter success as a captured regulator...being rewarded with additional powers and responsibilities? How likely are these powers to be used for the forces of good, as the Fed's track record is pretty darn pathetic in this regard? Captured regulators bear a disturbing similarity to the fox guarding the henhouse.

[MN]

Now has come the time to replace that old-fashioned statue of Abraham Lincoln in Washington, D.C. by a new, post modernist one of Vladimir Lenin!

[dd]

Was it legal?

The Bush administration never bothers about legal niceties but it does like its "unitary" executive orders and no doubt there is one somewhere around.

[Bruce Wilder]

anne: "Paul Kedrosky is right . . ."

Right about what, exactly?

I thought he might be trying to be funny, but it never crossed my mind that he might be right about anything he said. He made no sense.

[bakho]

My belief in the Laissez Fairy is shattered.

[Patrick]

I agree with Wessel. The punitive rate is appropriate, but the shareholders should have been wiped-out, the bondholders should have taken a haircut, senior management and probably most of the board should have been fired/remove, and the Fed should be 100% owner. Once the taxpayer is reimbursed, it could be sold back into the market for a profit.

[Jim]

Some damping is in order. The system will decline to a low point, and damping does reward some who should be taken to the wall and shot, but it ameliorates the shock as the system adjusts to to the post narcotic reality of rational funding.

says...

I would think such action would make the "goose steppers" happy.

All of a sudden all the libs have turned into mini Milton Friedmans.

You people are hilarious.

[Jay]

So I ask the lefties one question.

Are you finished calling the U.S. a free market society and blaming all our ills on free market economics?

Also, Bill Gross should go to jail.

And a list of bonehead policy ideas...

http://www.foreignpolicy.com/story/cms.php?story_id=4461&page=0

[Ken Houghton]

79.9% actually. And I suspect the difference will be key in the near future.

Moral hazard is certainly abused in company. "Risk homeostasis" a bit less so, depending on whether you're hanging out with Econometrican Mark Thoma or Anne, probably.

I'm more worried, of course, that no one else thought L+850 was to low a rate for AIG for two years.

Only about 300 points left for the Dow to be below where it was the George W. Bush took office. What excuse will Donald Luskin use to lump him in with the "Democrats"?

[CasualObserver]

Jay,

Please elaborate on your Bill Gross theory. I am very interested in hearing your take.

[James Kroeger]

So you as a taxpayer now have a large stake in AIG.This is not actually accurate, Mark. The Fed is a privately-owned entity [owned by commercial banks] that receives no funding from taxpayers. So I don't know how one can strictly say that the taxpayers own a piece of AIG if they don't even own the entity (the Fed) that made the purchase of equity.

I find it even more interesting that the commercial banking industry---through its 'Fed Asset'---actually bought a share of a privately-owned company's equity with money that was [likely] created out of thin air. I rather wish that it was the taxpayers who had made the purchase.

[ken]

AIG has plenty of cash flow to service its debt both to bondholders and to the government. So everybody take a chill pill.

The Fed doesn't have to answer to the market. I think that is what is behind most of the anger here. They tossed cold water all over your schedenfreude. Deal with it.

[Steb]

I think the financial markets are probably the most crooked game there is to play. Freddie and Fannie are bailed out. Bill Gross made a fortune. It was rumored that the bailout was also made to appease the Chinese and Russian central banks who held a lot of their debt. As to Lehman brothers, it was reported that the treasury analyzed who would get hit, would it be worth helping and decided it was worth not bailing them out.

It's a crooked game because obviously there's a lot of inside trading going on or at the very least decisions on who'll take the hit and who won't.

The WSJ ran a column that moral hazard has returned to wallstreet. Hell, it never left. It's one of the pillars the game is founded on.

[Jesse]

Is the Fed really receiving 'ownership' of an equity share of 79.9% in return for their 'loan' of 85 Billion?

The loan is to be paid back over 24 months at LIBOR + 850 interest rate, which is north of ten percent.

And after AIG pays this loan back in full with interest, the Fed keeps the 80% ownership?

It will be interesting to see the details behind this, if nothing else because it is necessary to value the shares, which are a DJIA component.

[BJ Feng]

James, you're technically correct, but the FED operates as a government entity and is controlled by the government. The President appoints the FED chairman, and I believe, 7 out of the 12 board members.

This is very disappointing because bondholders and stockholders are receiving a large subsidy instead of being punished for bad decisions.

Hank Greenberg was on CNBC earlier and he said he was working on taking AIG private with a group of other investors. He had been trying to contact the Board for weeks, but they won't even take his calls he said. Realistically though, the likelihood of a private funding source was slim. Everyone is deleveraging right now, that's why no one can afford to step up and buy AIG or loan them money. That would accomplish the opposite of what they are trying to do. Only a non-financial company would have the ability to buy AIG or give them a loan, but firms like Microsoft and Walmart aren't in the insurance or loaning business so there's no reason for them to step up.

I feel that the stockholders are going to benefit far too much, I also wonder if a 80% equity stake is too little given the circumstances. At least the $85 billion dollar loan has a very high interest rate, it's doubtful that stockholders will be able to profit for many years, but they shouldn't at all.

If AIG is indeed solvent as the management claims, then bondholders would have received all their money back after reorganization and an orderly liquidation. I somehow doubt that AIG's valuations on their mortgage and CDS holdings were realistic given that more declines are expected. This is not a good day, even if taxpayers are able to recoup all of their investment in the future.

If there are going to be firms that are too big to fail, then those firms should start paying into an insurance fund, like the FDIC. Furthermore, all the other "too big to fail" institutions should be on the hook for any shortfalls in the new fund if needed. I think this is the new path we have to take, we don't want government funds to be used to save a private enterprise. This is unfair to everyone who can't get a government bailout when their business fails, and no, we definitely don't want government to bail out small business owners.

[BJ Feng]

Jesse, if I'm reading the story correctly, the FED has warrants, which gives the right to buy stock at a certain price or upon certain conditions. Warrants are very much like stock options, meaning that the FED will be able to profit from any move up in the stock from now on, they'll be able to buy 80% of the company at these current prices no matter what.

What probably will happen is that the FED will not exercise their warrants, and when everything is all said and done, they'll sell off the warrants. That's because exercising the warrants for a direct 80% stake would cost more money, they would have to cough up funds to buy the new stock. This way, they maintain control without ever having to actually buy AIG stock, if ever a time comes that they need formal control or AIG needs more equity, they could exercise the warrants and put in more money.

[BJ Feng]

If you are thinking about buying AIG stock, be careful. Warrants have a very negative effect on stock prices and future stock appreciation. Basically, all the outstanding shares of AIG today represent only a 20% stake, so you are buying a share of 20% instead of 100%. That market will take that into consideration along with all the details.

[Ryan]

"James, you're technically correct, but the FED operates as a government entity and is controlled by the government. The President appoints the FED chairman, and I believe, 7 out of the 12 board members"

Entirely irrelevant to his point, which is that the assets are not owned by the populace. Everyone won't receive a check if AIG somehow manages to cover their obligations and increase stock value. At the most, tax payers might get less of a tax hike. Hardly a consolation.

[Oupoot]

Too big to fail? Then cut it down to size! I think this is what the Fed should encourage. With this bailout, this is what is likely to happen to AIG. All firms that has failed so far is being cut to size. But what about the remaining firms? They should also be cut down to size.

[ken]

"At the most, tax payers might get less of a tax hike. Hardly a consolation. "

NO. But better than a poke in the eye with a sharp stick. Which is what the tax payers, along with everybody else, would be getting should AIG fail in the morning.

[rufus]

AIG has plenty of cash flow to service its debt both to bondholders and to the government. So everybody take a chill pill.

The Fed doesn't have to answer to the market. I think that is what is behind most of the anger here. They tossed cold water all over your schedenfreude. Deal with it.

Absolutely, just sit back and relax...no worries. Washington Mutual, Goldman Sachs, Morgan Stanley...just forget about it. Since all we really want to do is rejoice in others' misery, it looks like we'll have plenty more opportunities as asset write downs continue.

http://www.reuters.com/article/reutersComService4/idUSLG7928220080916

[Ryan]

"If you are thinking about buying AIG stock, be careful"

Surely you jest.

[rufus]

Goodbye Lehman, Hello deflation: James Saft
Tue Sep 16, 2008 7:51am EDT

http://www.reuters.com/article/reutersComService4/
idUSLG7928220080916

[Women On Welfare]

Golden Boy Management

Article: In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

Yep, as said in another comment, this is just Chrysler Redux (1971). All we need do is exchange the words "Automobile Sector" for "Finance Sector" and basically use the same lamentable announcement text.

Saving American Finance from the idiocy of its Golden Boy Management. And, what have we learned from this latest chapter in the Big FUSS (Forever Unending Subprime Saga)?

That if you are an insurance company with 71 million clients, you have a different level of exposure to the general public than a Lehman Brother investment bank with decidedly lesser exposure to the citizenry.

[hari]

Looking into the *rearview mirror* won't get you thru this financial crisis because there is still a lot of misery to come, so it seems.

Our minds are full of cobwebs which spell moral hazard, in one way or another.

From a policy perspective, I suppose it's the global interconnectivity of AIG cross-holdings which finally cracked the resistance of BB/Paulson - to give a life line to an insurance company with global reach.

[Lafayette]

Miracles CAN happen

hari: Looking into the *rearview mirror* won't get you thru this financial crisis because there is still a lot of misery to come, so it seems.

This is the conventional wisdom of the Gloom & Doom crowd, mostly inspired today by an economic phenomenon that happened seven decades ago -- which bears little real resemblance to today’s mess. (Then it was real economic collapse, today it is credit collapse. Yes, yes, in America's credit-economy, that's serious. But, is it life threatening?)

All this toxic waste is based upon debt that is hanging loose on somebody’s books around the world. But, as it is transferred from the debt part of an investor's balance sheet to a homeowner's net worth credit balance, it becomes less of a threat to the mighty Credit Machine that runs America.

I heard an interesting statistic as to why this present chaos is more probing to the American economic scene than European. I'll call it the 40/10 - 10/40 statistic. Forty percent of Americans have their savings tied up in equity values and much less than ten percent in savings accounts. The reverse is true for, at least, the French: 40% have their savings in low-interest savings accounts and less than ten percent are exposed on the equity markets.

This effectively means that Europeans have more savings to unleash on spending than Americans may have in depressed equity positions. I suspect that these figures can be extrapolated easy enough to the rest of Europe.

If Europe is in the economic doldrums, then it is because of infrastructural factors -- chronically high unemployment coupled with lack of employment mobility. And an inability to apply Keynesian Active Economic Stimulation -- because national treasuries are already bridging the Treaty-defined limit of no more than 2% deficit limit. They cannot expand, even if they wanted to by prompting government spending.

So, they are all waiting for the 500 pound canary (Uncle Sam) to get back on track, because it has a potential for indebtedness far, far greater than Europe.

Let's not forget, at the heart of this global economic maelstrom is the US, with its tremendous economic potential for consumption. Consumption generates economic activity, credit services it. Yes, consumption will contract, but by how much? As much as it did in 1929? No way, José, say most economists.

So before pumping up, yet again, the Gloom & Doom balloon, let's remember that commodity prices are coming down, which is, ipso facto, an indirect price deflator. The price deflator is working actively in the US residential housing market. Is the bottom near? That answer will stimulate a great many bloggers to respond. But, nobody knows just yet.

And, the threat, often repeated, that we did not know "the true extent of the damages" is reaching its first half-life mark. The accountants have been into Bear Stearns and are beginning to have a good idea of the extent of debit damages.

Think positively, y'all! Miracles CAN happen.

[dd]

Well, at least the British press provides some real insight or perhaps the real trigger for the deal:
AIG fears cause securities trading to halt
Shareholders were left unable to trade popular commodity securities yesterday, due to fears over the future of their backer, AIG.
Banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer and sold by ETF Securities (ETFS). The price of the stocks also plummeted due to the worries over AIG.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/17/cnetc117.xml

[me]

"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. "

Says Paul.

Hey Paul, GM just took on a lot more of Delphi's pension obligation or did you miss that? Now they are TBTF or they will break the pension trust.

It never ends. Private profits, social losses.

Funny how we can never afford affordable health care like the rest of the civilized world but we can always bail out banks and insurance companies and foreign despots.

[me]

I just say PK and Lissman on CNBC and PK says its a special case, no moral hazard and Lissman says every week its a new special, case, where does it end. No answer, just a chuckle.

[Lafayette]

BJF: James, you're technically correct, but the FED operates as a government entity and is controlled by the government. The President appoints the FED chairman, and I believe, 7 out of the 12 board members.

Uh, a slight exaggeration there, BJ. The government, if you mean the Executive, has no power of authority over the Fed. Congress has "oversight", however.

The intent is to assure than the Central Bank remains as independent as possible of both Executive and Congressional powers for purposes of political manipulation -- meaning priming the economy to get re-elected.

From the FRS Document, "Purposes and Functions": The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The System is however subject to oversight by the US Congress.

The federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government: therefore the description of the System as independent within the government is more accurate.

There is a fine line that Presidents, in their desire to "advise and counsel" a FED Chairman, do not trespass. Meaning, telling them precisely what to do. It is nonetheless assured that the PotUS is informed of Fed decisions before they are implemented.

[BJ Feng]

After examining the details of this "bailout", it's clear that this intervention was done so that AIG's assets could be liquidated in an orderly fashion, not so that the company can continue on in its current form. I think the terms of this "bailout" were especially harsh for several reasons.

1) The FED/Treasury wanted to make sure stockholders didn't benefit much if any from this "bailout".

2) The terms make it very likely that the Taxpayer will not lose money from this loan, the taxpayer is getting a good deal.

3) The FED/Treasury really didn't want to do this and wanted to make clear that any company who doesn't raise equity from the private sector when they could have shouldn't expect a better deal from the government. In fact, they should expect a very bad deal from the government. The past few actions indicate that shareholders should expect to lose just about everything if the firm has to be "bailed out", and that the FED/Treasury will get the vast majority of any profits along with future profits.

[Lafayette]

It's pay-the-piper time

BJF: The FED/Treasury really didn't want to do this and wanted to make clear that any company who doesn't raise equity from the private sector when they could have shouldn't expect a better deal from the government. In fact, they should expect a very bad deal from the government.

Well put. A highly endorsable comment.