Fed takes over AIG

http://dealbook.blogs.nytimes.com/2008/09/16/federal-reserve-may-act-alone-in-rescuing-aig/

by furiouslol • 18 years ago

84 188 18 years ago

dealbook.blogs.nytimes.com

Alaric• 18 years ago

I think some questions have to be asked about how risks are mitigated since AIG appears to have a 400bln$ portfolio of CDSs and looks to have been hours from the brink of potentially passing that risk back down through the system. The counterparties of AIG's CDS must be mightily relieved.

furiouslol4• 18 years ago

Here are more complete articles:

http://www.nytimes.com/2008/09/17/business/17insure.html?_r=...

http://online.wsj.com/article/SB122156561931242905.html

yamil2• 18 years ago

Welcome to socialist states of America

vitaminj2• 18 years ago

I'd prefer to call it the pragmatic states of America. You can't live on ideology alone.

sethg5• 18 years ago

You obviously missed the LCTM bailout ten years ago. Also the S&L and the Continental Bank bailouts of the 80s. Also the Lockheed and Chrysler bailouts of the 70s.

nickb2• 18 years ago

Partially correct. It's socialism for the rich. If it were socialism, you wouldn't have poor/middle-class people dying from treatable diseases.

yummyfajitas4• 18 years ago

What treatable diseases are poor/middle-class people dying of, that could be prevented by socialism?

mseebach2• 18 years ago

> If it were socialism, you wouldn't have poor/middle-class people dying from treatable diseases.

No, since nobody would be middle-class or above, it would only be poor people dying from treatable diseases.

albertcardona2• 18 years ago

Hasn't the USA been engaged forever in heavy market protection, tariffs for imported goods, and heavy subsidies to internal industries like metal foundries, the car industry and particularly agriculture?

Hasn't the USA at the same time demanded open markets of all other economies in which it invested or participated in some way?

Hasn't the USA's tax dollars funded most private research, yet the economic benefits have been ripped by private industry?

The double standard is just showing a bit more than usual at the moment, but nothing has changed.

Prrometheus• 18 years ago

When you have a $3 trillion entity in an economy, people have the incentive to petition it for favors. Even when the government's budget was a lot smaller, businessmen could still finagle for tax breaks and the like.

Rent seeking is in the DNA of democracy.

netcan16• 18 years ago

Government owned companies does not mean a socialist country. It's something socialist countries do.

Eating grass doesn't make you a sheep.

helveticaman7• 18 years ago

Eating grass is still stupid.

mynameishere2• 18 years ago

Quacking like a duck doesn't make you a duck.

God, that was too easy.

sd2• 18 years ago

Obviously, it's impossible to determine the effect of any one action on the economy -- but if this $85b prevents the markets from crashing, I'd argue its money well "spent." U.S. market cap has already fallen $4t in the past year. Do you really want to risk losing considerably more?

ojbyrne3• 18 years ago

That was the argument for Fanny and Freddie. Didn't seem to work, and I bet it won't this time. WAMU is next.

byrneseyeview2• 18 years ago

You're ignoring the question of whether or not the market should crash. If stocks are overpriced, then intervention like this just means we'll spend more time acting as if they are not overpriced, and that would be awful.

For what it's worth, my day job and my main part-time job are both entirely dependent on the market, so I sure hope the market doesn't need to crash. I agree with David Einhorn (who, by the way, has been short Lehman for a while): the stock market is okay, but the credit market is way overpriced.

quasimojo5• 18 years ago

but if this $85b prevents the markets from crashing

it won't. this loan doesn't unwind the terrible decisions aig (and others) made, nor the hedges they tied to those decisions, and the hedges they tied to those hedges, and the hedges they tied to those hedges.

the derivatives unwind cannot be stopped short of a repudiation of all global currencies. the amount of leveraged capital in hedge deals is still north of $100 trillion. no one has the money to pay that out. it would be easier just to erase the USD dollar than to circulate $100 trillion in new fiat wealth...the effect would be the same anyway...worthless dollar

iamelgringo• 18 years ago

The US has actually had a much more mercantile approach to business than socialistic. They are capitalistic up to a point, but the governent tends to step in and manage, regulate, bailout, give tax cuts to companies and industries when they deem necessary.

There are entire industries that are heavily subsidized and regulated, Telecom, Healthcare, Energy, Transportation, etc... Our countries national roadway system came about more or less as an assistance to the automotive industry. The 401k laws have been a huge boon to the stock market.

And, now, the government is making a big move into finance and investment banking.

eru8• 18 years ago

I hope they get some international competition.

pmorici• 18 years ago

Isn't this called fascism?

DenisM• 18 years ago

Whoever modded you down needs to know that collusion of state and big business is a distinct attribute of fascism.

davidw4• 18 years ago

This is exactly the kind of comment that I feared we would see when articles like this start gaining traction. It's a cheese puff comment: it's got some taste, but it's empty. It has nothing to back it up, no content, no reasoning, no well crafted argument. It's just an empty "rah rah" type of slogan of the type that politicians regularly regurgitate. There is nothing new or clever about the comment, it's the sort of thing that's made the rounds elsewhere 100's of times. Being such a cheap, throwaway comment, it mostly/usually doesn't lead to particularly interesting discussions, as we can see here, despite a few good comments, but more zingers, one liners and similar "go home team!" cheering for one political side.

steveplace3• 18 years ago

Freedom.

yamil2• 18 years ago

My comment was one of the first reaction to the post (16 hours ago) it was a spontaneous reaction to the somehow shocking news that the US government is taking (again) over a private company in the financial sector. When I wrote "socialist" it was for the irony of the situation, the financial market in the past has been very hostile to any regulation and it is the most visible flagship of liberalism as we know it since Reagan. People who read about economy (check comments bellow) know exactly what I was talking about, this is a well known topic about the contradiction between "less government, less regulations" and "the need of government help in time of troubles". Some more clever and much more articulate people wrote about it and their conclusion is the the current crisis is a direct consequence of lack of proper regulation in the first place. Go read the source it's free, it's online, it's better than expecting Techie guys to spend 30 minutes of their precious time writing a "reasoning" and "well crafted" comment a topic which is only one of their many "hobbies"

furiouslol4• 18 years ago

AIG is getting badly punished for this.

They are getting the loan at LIBOR + 8.5%. That's downright punitive.

LIBOR + 8.5% is not a rate at which a company with AIG's business model could survive at. AIG lends to people at around LIBOR + 4% for mortgages or LIBOR + a lower % to insure BBB to AA rated borrowers.

They'll probably have to sell off their assets in a hurry at below fair value. The longer they wait, the more pain the high interest inflict on them.

icey• 18 years ago

Well, thanks to you I just learned something. I had no idea the US government used the London index to figure out rates for loans. I actually went and looked it up; and you're totally correct.

Amazing.

jcl• 18 years ago

What happens to them if they fail to pay it off?

krschultz2• 18 years ago

So if big companies can't fail what prevents them from taking a risk that ends up this way in the future? Small companies have the advantage of being able to risk it all, big companies have the advantage of large sums of capital. To upset that balance is to increase the barrier of entry for small players.

sethg5• 18 years ago

Well, the government is buying the company out (and, one hopes, firing the CEO and board) and diluting the existing shareholders' stake, so it's more like "big company sucks up insolvent small company for pennies on the dollar" than "government helps cronies by pouring money into badly-run business".

nickb2• 18 years ago

Pennies on a dollar? Do you mean negative dollars because for this "loan", the government has "bought" a two trillion dollar debt, at the very minimum.

reynolds• 18 years ago

Is the Federal Reserve part of the government?

kqr2• 18 years ago

Yes, all these bailouts create what is known as a "moral hazard"

http://en.wikipedia.org/wiki/Moral_hazard

tdavis• 18 years ago

Precisely. Nobody should get bailed, the economy should collapse for a little while and eventually get itself sorted out. The moral should be, "an economy cannot run on practically free credit alone."

bayleo• 18 years ago

The attitude with which these companies have been conducting business would seem to indicate that this is hardly the first time we've created moral hazard.

netcan16• 18 years ago

The same could be said of incorporation or bankruptcy laws.

ckinnan• 18 years ago

I want a bridge loan for my startup. Instead, I get to pay taxes to pay for this nonsense.

steveplace3• 18 years ago

Incorrect. You get to pay taxes for this someday. The bailouts are financed with debt, not cash.

I, for one, welcome our soverign wealth fund overlords.

run4yourlives6• 18 years ago

More correct, your grandchildren will pay taxes for it someday. (Hey, we're being specific after all)

sethg5• 18 years ago

I am happy to report that one element of Obama's tax plan (http://www.barackobama.com/pdf/taxes/Factsheet_Tax_Plan_FINA...) is to "eliminate capital-gains taxes for entrepreneurs and investors in small business".

ok1111• 18 years ago

So if he's elected, and that's not what happens, will I be able to hold him accountable to this internet PDF?

ericb2• 18 years ago

How will eliminating capital gains taxes help me as a small business owner. Lower corporate income tax rates would be intuitive, but lower capital gains taxes is kind of a head-scratcher.

Should I invest in stocks via my business?

Angostura• 18 years ago

If AIG went down, do you in some way think you would find it easier to get a loan. On the contrary, I think it would be unlikely that anyone would be lending anyone anything.

bsaunder• 18 years ago

I'd prefer to see the government take even half the amount of money and offer lots of smaller grants/loans to innovative entrepreneurs to launch our country into the next wave of growth. That's where the new jobs and economic growth will be. Give it to people creating value.

kingkongrevenge2• 18 years ago

I have been building savings since I was 15. I have a fair amount of money in the bank for someone my age. I WANT it hard to get a loan. I want all these other people with no savings cut out of the market for housing, for business opportunities, for education. That would leave me first in line.

Propping up the credit market is, yet again, screwing savers like me in favor of the spendthrifts.

run4yourlives6• 18 years ago

You make it sound like that's a bad thing.

Lest we forget that easy credit and living above our means is what got us into this mess in the first place.

sethg5• 18 years ago

Somewhere, the ghost of Karl Marx is saying "WTF? They're nationalizing an insurance company?"

eru8• 18 years ago

Karl Marx did not tend to write that clearly. Add some dialectic materialism.

Have you ever read the guy? It's awful.

aston• 18 years ago

"The Federal Reserve plans to offer an $85 billion bridge loan to the American International Group in return for control of the ailing insurance giant..."

Nice redefinition of AIG.

mtw• 18 years ago

$85billion!!!

where do the Reserve get the money? do they print it? gold reserves? next year's taxes? asia?

nazgulnarsil2• 18 years ago

all of the above.

quasimojo5• 18 years ago

where does the treasury and fed get the money? THEY PRINT IT

a 1982 law lets treasury notes be redeemed with CREATED accounts, as in one of the partner banks of the reserve simply creates a new account by punching in the digits, and they assign it to you

once again, this is law since 1982

this is why US treasuries have 100% certainty inside the USA while the US dollar still exists

gills4• 18 years ago

they get it FROM YOU.

pageman2• 18 years ago

it's "fiat money" - more on this by Gary North - http://www.lewrockwell.com/north/north652.html

jmatt2• 18 years ago

What harm is there in letting a company that made bad decisions go bankrupt? I don't see how it's pragmatic to pass this burden on to tax payers and the general public. I admit that I am idealistic about such things. I don't see how government is going to solve any of these problems. The government will lessen the pain but that same behavior will also slow any rebound and future growth.

It seems naive and narrow minded to think another company won't step in if there is a continued need for the services that AIG provide{d|s}. This new company is likely to make better decisions. First, because they saw AIG fail. Second, because they didn't fail and thus were stable enough to exist while other giant financial companies failed.

netcan16• 18 years ago

In the long run we're all dead.

eru8• 18 years ago

You and Mr. Keynes, maybe. Ray Kurzweil, no.

dpapathanasiou2• 18 years ago

It seems naive and narrow minded to think another company won't step in if there is a continued need for the services that AIG provide{d|s}.

But it's unrealistic to think that the vacuum could be filled fast enough to prevent a wave of failures among AIG's clients (banks who bought credit insurance to get around regulatory limits).

There's more detail here: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09...

jmatt2• 18 years ago

Thanks, this is the first reason that I've heard that makes sense. It's part of the world financial infrastructure.

netcan16• 18 years ago

So is this a reasonable system for insuring against the collapse of insurers (and the world's financial infrastructure)? Government rescues?

How about limiting the size of companies that are not allowed to die for damage control? Or limiting their ability to become companies not allowed to die?

nradov4• 18 years ago

Let it all blow up. It will be painful and disruptive in the short term, but in the long run our economy would be much stronger. Most companies in the finance, insurance, and real estate sector of the economy produce very little of real value anyway. The capital and employees could be used more productively elsewhere.

vitaminj2• 18 years ago

So far the blood on the streets is almost exclusively from the financial sector, ie. investment banks, hedge funds, etc. They may affect your pension funds but it's mainly institutional investors and others with big stakes in these companies that'll pick up the tab.

However AIG obviously isn't an investment bank. A failure of AIG would affect people outside of the financial sector who have purchased AIG insurance products (including me). The pragmatism of the fed bailout is to prevent the financial meltdown from spilling over into the real economy. Believe it or not, GDP growth in the US is surpassing projections (3.3% in 2Q 2008 ahead of a 1.9% estimate - see http://www.iht.com/articles/2008/08/28/business/usecon.4-326...). The real economy isn't doing that badly, and the pragmatic choice would be to protect that.

quasimojo5• 18 years ago

the 3.3 - 1.9 = 1.4% difference is precisely reflected in the oil bubble. now that oil is backing down, this number will also fall

huherto3• 18 years ago

I also have life insurance with AIG. How does it affect me?

I only have to cancel and buy it from another company. right?

nradov4• 18 years ago

That isn't fully incorrect; individual insurance policy holders are not at (much) risk. Their policies are controlled by regulated subsidiaries in each of the several states. Even if the parent goes bankrupt the subsidiaries will continue to operate and pay claims. And even if one of those goes down, the policies are guaranteed by state-operated reinsurance funds. There are some dollar limits to the reinsurance coverage but they are generally pretty high.

helveticaman7• 18 years ago

It all comes down to the government intervention paradox: whenever something bad happens, people ask for intervention, which implies the only entity willing to do such things, the government. The sad part is, to my knowledge, this intervention never works out for the best. When is the last time you heard the phrase, "thank goodness the government intervened! It did such a good job, and now everyone's happy!" with regard to the economy?

evgen2• 18 years ago

1933.

MaysonL3• 18 years ago

Let's see: the GI Bill, the Internet, Social Security, NASA's and DOD's funding of computer and semiconductor R&D all seem to have worked out fairly well. Not perfectly, but better than their non-existence would have.

wenbert• 18 years ago

god! this will affect the economy here in the philippines -- an the rest of asia. makes me sad :(

pageman2• 18 years ago

from Thomas Crouch, Thomas Crouch, deputy director general of ADB’s Southeast Asia department:

<i>"The Philippines is less vulnerable. It’s in a stronger position to withstand these events due to sensible and prudent fiscal response of the government." </i>

http://www.bworldonline.com/BW091708/content.php?id=004

fallentimes6• 18 years ago

Serious question that is actually very related: if you had to move to a foreign country and work on your internet start up, where would you move? Why?

krschultz2• 18 years ago

New Zealand - why - because it is gorgeous. Don't know if it is any good for business though.

iamah2• 18 years ago

Its number 2 according to cnn http://money.cnn.com/galleries/2008/smallbusiness/0809/galle...

ashu• 18 years ago

Your question should be an independent Ask YC thread. I want to know the answers too. (and I have none!)

fallentimes6• 18 years ago

All you; I've been a post whore this week. I don't want people to get sick of me :P.

helveticaman7• 18 years ago

Chile, because it is a capitalist country. Costs are similar to India, but the weather is Californian and taxes are really low. Still, though, SV is a better choice. Don't move to Chile to start up.

fallentimes6• 18 years ago

I'm asking in case it ends up not being the best choice in the future :). Also, giving 40% of one's earnings to the government is _always_ unacceptable. So hopefully that never happens here.

Raphael• 18 years ago

I was under the impression that Chile is socialist.

run4yourlives6• 18 years ago

Any of the Scandinavian countries, especially Denmark. They seem to know what they are doing in more ways than one.

fallentimes6• 18 years ago

What are your thoughts on their high taxes?

felipe• 18 years ago

China. As a matter of fact, I am learning Mandarin right now and I am planning to move from Silicon Valley to somewhere in China in a few years.

The book "Silicon Dragon" is a fascinating read.

thomasmallen• 18 years ago

This is just the finance world's Tower of Babel of credit and cheap money falling over, and will mostly affect rich bankers. I think that the everyday economy will be the same but with fewer imports as the dollar weakens.

rrf• 18 years ago

Whilst excessive risk taking is probably the root cause of the recent financial collapses, I think it’s also worth noting the role hedge funds have played in stirring up investor panic by short selling highly geared or mortgage exposed companies around the world. Britain’s largest mortgage lender, HBOS, had 30% wiped off its value yesterday, attributed to short selling - http://www.marketoracle.co.uk/Article6277.html

eru8• 18 years ago

How can short selling wipe out value? If it helps find the right price faster, isn't that a good thing?

lallysingh• 18 years ago

What's the right price?

rsheridan62• 18 years ago

If these companies are too big to fail, and we have to bail them out to avoid returning to the Stone Age or whatever, how about some for the people who created this situation? Maybe it's not ok to let the system collapse to punish a few people, but "heads I win, tails the taxpayer loses" is also unacceptable.

tortilla• 18 years ago

They should allow these companies to fail. The world would not of ended. If there's a need (market), new companies would have sprouted up. Stronger, better, and more transparent companies to fill the void.

Sweden had a major banking disaster. Their government allowed them to fail. Their banking system is solid now.

natrius3• 18 years ago

"If there's a need (market), new companies would have sprouted up."

You aren't even addressing the given reasoning for the bailouts. Meaningless platitudes don't solve problems.

evgen2• 18 years ago

The problem is that AIG underwrote a lot of contracts that were then used to cover leveraged positions, etc. It's turtles all the way down and AIG is somewhere down at the bottom of the pile. In addition to the load of mortgage debt it dabbled in it played a role writing insurance for a massive shitpile of financial instruments; if the underwriter declares bankruptcy then a lot of things need to be unwound in a hurry. This is a huge problem, and would have a far greater impact than letting some retail bank fail. While other companies could fill the void, they could not do so quickly. The speed that is required here is the problem (e.g. when LTCM went tits-up it had the good grace to do so on a Friday so that deals could be struck over the weekend.)

As far as Sweden's banks go, I think you should check again. They have losses in US mortgages (it wasn't just US and Chinese banks buying those securities) to cover and are also feeling the heat on over-exposure to Baltic loans that are starting to go sour. The Swedish bank takeover was somewhat akin to the US S&L takeover in the 80s, except in the US case it did not eat 4-5% of GDP...

furiouslol4• 18 years ago

I don't wish to make light of the situation but Paulson has moved the US Treasury from nowhere to the top of the M&A league table in just 1 year,

indiejade• 18 years ago

This news reminds me of an interesting video I happened across last year. From it, draw what conclusions you wish:

http://video.google.com/googleplayer.swf?docid=-905047436258...

Fed takes over AIG

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