AIG (AIG) is now owned 80% by the US government - another nationalization of our financial system. I am no longer shocked by anything the President, Fed, Treasury, and Congress does. Other than sovereignty (the right to do it to ourselves), why we ever fought the Cold War is beyond me.
Here is the Federal Reserve statement announcing this decision. As expected, they invoked the exigent circumstances clause (13-3) of the Federal Reserve Act.
A few thoughts:
Fannie (FNM) and Freddie (FRE) controlled almost 100% of the mortgage market. AIG is a competitor with many different public and private insurance companies in the US and abroad. The US is now in direct competition with its citizens and taxpayers, as well as foreign entities. Our claims against foreign subsidies are greatly weakened.
I am doubtful that AIG’s liquidity needs will end with the initial $85 billion the government is putting in.
The idea that the US government is now the counterparty for all those Credit Default Swaps is absurd.
Please reread what I wrote about the THE ULTIMATE COUNTERPARTY on March 6, 2008 a week before Bear Stearns blew up. Here’s a sample:
The biggest example that is still being ignored is the entire Credit Default Swap market. Every once in a while we see hints of the losses that will eventually hit, but they are always downplayed. Never mind that it is the embodiment of counterparty risk and has a notional amount of approximately $45 trillion. Somehow the lovers of CDS feel it is immune to loss simply because it is designed to counter counterparty risk. Eventually we will suffer from that ignorance.
There are multiple tiers where moral hazard meets counterparty ignorance. The higher it goes, the bigger the consequences. The ultimate counterparty? The United States Government.
I understand the consequences of an AIG failure. I’ve been harping on the risks posed by Credit Default Swaps for quite a while and during all that time, I did not see our political leaders or regulators do anything to prevent this catastrophe. I am not impressed by or calmed by or confident in our government and yet, I realize that the market will likely cheer what was called “a triumph of pragmatism over ideology.” THIS IS NO TRIUMPH OF ANY SORT.
In the short term, this avoided a huge problem. In the long term, we will pay for what has been done.
This article has 5 comments:
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CrossProfit
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567 Comments
My Website
Sep 17 04:31 AMPlease explain in plain English, exactly what you mean and how this will come about. Also, please explain exactly how the $45T in CDS is a $45T loss. Perhaps you are attempting to say something else? It is not very clear from the above that you understand how a CDS works.
CrossProfit
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fxtrader07
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618 Comments
Sep 17 06:04 AMGo that?? They get 17BILLION $ in interest income from this!!! That#s 17 billion return on an invested capital of zero. If that isn't a bargain for the fed, i don't know what is
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Looch
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5 Comments
Sep 17 12:01 PMWhile professing "pragmatism" to be a disclaimer on moral choice, those who have chosen this path have absolutely made a value judgement on what course of action to be take.
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Hal.P.
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26 Comments
My Website
Sep 17 04:14 PM-
Stacia E.
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1 Comment
Sep 25 05:00 PMSome people lost homes because of poor plamming etc., but some lost homes out of illness, death of spouse, or family tragedy(disability etc). These people are to repay this loan to "fix" the woes of this entity in the private business sector.
I know we don't want a repeat of 1929, but this whole thing is hard to "swallow". Still trying to understand......