Posted on 09/16/2008 4:22:50 PM PDT by rabscuttle385
Does this mean the US govt has taken that role, are we on the hook for the $45T of credit swaps? Have we taken on that risk?
No, AIG will sell some of their plentiful assets and the loans will be paid back.
We are not buying assets like we, the taxpayers (C/O the Fed) did in the Bear Stearns case. But Whazzup is wrong about selling assets and paying back the loans. AIG is insolvent with the current level of loan defaults that they have insured. The defaults are getting worse and will continue to. This costs us money (via the Fed), postpones the pain and will make the ultimate pain worse. Of course the immediate pain we would get from AIG defaulting would be worse right now, so we are stuck having to save them.
Insurance against loan default risks in credit swaps has mispriced the risk because the market knew that the events of tonight would happen. If successful, it will help reinflate the credit bubble and cause a bigger bust at some point in the future.
The Fed is smart enough to try to unwind some of AIG's obligations. But with their other hand they are creating more problems by not raising rates. Mispriced credit is the root of all of these problems.
We are the new owners, so yes. At the same time we greatly lowered the immediate risk of defaults on the loans behind the swaps. So on balance it's not too bad in the short run. The Fed is also hoping housing or the economy or something turns the corner because the short run could end rather quickly if the credit crisis continues.
Of course I must mention in each and every post, continuing the credit-based economy ($5-6 in new credit for every dollar in GDP) will inevitably lead to catastrophe. The best analogy I have for the situation is putting out forest fires by dropping lots of wood on them to smother them.
The bottom line is the $45T in swaps is at risk of cascading defaults, but the taxpayer owners (via the Fed) of AIG are not on the hook for anything close to that.
“Btw, one of the reasons the stocks didn’t take a drop today was that the Fed passed around $70 Bil this morning in loans. “
It appears that the President’s Working Group on Financial Markets has been busy in the futures markets.
See:
http://www.nypost.com/seven/09162008/business/wall_streets_stormy_week_129333.htm
Yeah, I would like to read some of their decisions.
Oh, wait. Oops!?
Parlons-nous francais dès maintenant?
AIG has a little over $200B in assets, a little over $300B in liabilities (including over $160B in long term low interest debt, which is not a problem because company is highly profitable and makes a lot of money on the borrowed capital) and over $650B in derivatives that need to be unwound in orderly and calm fashion to prevent serious disruption to the markets and economy.
We don’t want another “no-bailout” like Lehman which was too far gone to be “saved” and was not too big to fail (but still took the DJI down 500 points in panic atmosphere, with politicos taking advantage of it), though Fed and Treasury valiantly tried to prevent its bankruptcy and ensuing market panic. They did next best thing - prevented Merril Lynch from being the next link in the chain of financial targets by offloading it to BofA, just like they did with Countrywide earlier this year.
See this enlightening tidbit: Fed Repaid JPMorgan $87 Billion for Lehman Financing - http://www.cnbc.com/id/26746448/
You are right, it’s not a “bailout” of investors, Maurice “Hank” Greenberg lost $6B in stock in the last week alone; just 4 months ago AIG market cap was worth over $130B.
But neither is this a conventional “bridge loan” designed to leave the company intact. They are trying to avoid another “Lehman” on steroids, which is too big to fail - it’s an orderly liquidation and selling off pieces of public company that was attacked by short-sellers, through the Fed providing a DIP credit facility for the duration of the process. In fact, Treasury is practically running AIG already: “Former Allstate CEO Edward Liddy will be named the new CEO of AIG, which has avoided bankruptcy with the help of an $85 billion loan from the federal government, in exchange for an 79.9% stake in itself.”
Since there is nothing wrong with AIG’s business side - it’s actually a profitable company with good assets, there is even a good chance that taxpayers may make money on the deal over time. Government has no interest in running AIG, but neither will be there a rush to get rid of it, it’s not like it’s bleeding cash and its nominal “market cap” will no longer be relevant, just like nobody cares anymore about “market cap” of Fannie and Freddie.
Thank you for the important details and clarification!
You have no idea how upset I am by the latest turn of events on Wall Street -- it's against the very essence of conservatism that people face the consequences of their actions.
I know AIG had to be bailed out to prevent worse damage. But, I don't like it one bit.
That requires a functioning market. If I am able to loan too much money at a ridiculous teaser rate because the Fed has forced short term rates low, that is not a correctly priced market transaction. If the securities regulators overlook fraudulent ratings given to mortgage backed securities (based on infinite price appreciation of housing in 2005), that is not a functioning market. If the government forces loans to be made in the bad parts of town, that is not a functioning market.
The consequences of all these "innovations" and interventions was systemic risk. The market reaction to systemic risk is a severe credit crunch (banks not lending to other banks). The only really conservative solution is to raise rates to reflect realistic risks but intervene in cases of systemic risk. But Fed doesn't care about being conservative, at least not Greenspan and Bernanke.
Amazing. None of the recipients have party affiliations. They must all be non-partisan community organizers.
They are nationalizing the financial sector using taxpayer’s
money!
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