Welcome to the United Socialist States of America.
Posted on 09/17/2008 9:52:58 PM PDT by BGHater
By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.
The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.
While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?
Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?
AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.
I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.
On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.
The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.
I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler’s debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with “good” intentions. Today's historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.
This whole thing has been giving me a quesy stomach from the beginning. More freedom lost. End times?
Bush said from the beginning that economically, he was a Keynesian, albeit a “conservative” Keynesian. To be a Keynesian is, essentially, to be a socialist. A Keynesian must believe that the free market cannot work without the guiding hand of government and outright control in at least some circumstances. In other words, the market cannot be free. A “conservative” Keynesian thinks he desires a system that looks like a free system and desires an end product that has conservative values and conservative style. But, as they say in Maine, you can’t get there from here.
Just ensure ‘your’ finances and house is in order. Things will get better. They always do. As Americans, we live in a bubble.
You thinks its bad here? No way. Egypt is down 90%. China 60%. We are only down 20% ytd.
Continue contributing monthly and you'll be buying while it's lower as well.
Excellent article...
Good advice, except for the huge majority of people in this country that are in debt up to their eyeballs.
And for those of us who 'do without' when we can't affort it - it's difficult to manage our house when the government keeps bringing in a front-end loader to shovel dirt out from underneath it.
Yeah, I know. You gotta prepare for the worst, hope for the best.
Welcome to the United Socialist States of America.
Can someone explain just why AIG is failing. They’re an insurance company. Were they insuring bad mortgages, houses lost in natural disasters or something I’m not connecting to?
Socialism won’t be brought to the US in the form of socialism. It will be packaged as liberalism, with no distinction between this new liberalism and the classical liberalism, which is almost exactly the opposite.
Of course that started a long time ago and it keeps getting worse.
Why is AIG in crisis?
1) CDS: Unlike most other insurance companies, AIG plunged into the market for credit default swaps, which are contracts that act like insurance by protecting investors against default in a range of assets, including subprime mortgages and corporate bonds. Swap buyers make regular payments to sellers like AIG, who in turn have to make payouts if a default or bankruptcy occurs. As the risk of default on the assets has increased, AIG has had to write-down the value of the protection it sold and post collateral to its counterparties.
2) MORTGAGES: AIG also has other businesses that are exposed to the troubled housing market, including a unit that makes mortgage loans to consumers and a unit that promises to make payouts to lenders if a borrower can’t pay the mortgage.
3) INVESTMENTS: Like any insurance company, AIG funnels premiums paid by policyholders into myriad investments aimed at generating profits to fund future claims. Amid the upheaval in the markets, some of those investments have fallen in value.
http://blogs.wsj.com/wallstreetcrisis/2008/09/16/questions-and-answers-on-aig/
AIG is/was the 6th largest company in the entire world - and the largest insurance company.
They had their hands in everything, including the issuing of insurance to investment firms, heavy interactions in the derivatives market, offering protection against loss in most municipal bonds, etc., etc., etc.
This was a no-win situation that has been building since the early 1990's. AIG declaring bankruptcy would have created widespread economic collapse among a lot in industries across the world. Instead the Fed stepped in, and now we'll only have widespread economic collapse across some industries across the world.
Thanks so much for the excellent summary!
Not sure it surpasses the New Deal, but it is a huge lurch, nonetheless.
...and government meddling in the capital markets will only create more problems going forward, more “crises” for leftist politicians to exploit and for which GOP politicians will say “me too.”
This is what has happened with the US health care industry. Thanks to those who seek to create heaven here on earth, we now have exploding medical inflation as consumers pay for virtually all of their medical expenses via insurance.
The solution is obvious, yet every politician and many businessmen are pushing for the exact opposite. Poor managers hate competition. All politicians and bureaucrats crave power. Our system relies on the character of those in leadership to restrain themselves and to do what is best for this country, not for themselves.
I’m almost tempted to vote against every incumbent on the ballot this fall simply to throw the bums out, but sadly all that means is supporting new bums to take their place.
Meanwhile, a large portion of the electorate doesn’t seem able to understand what has happened and why it is important.
Yes, a large part of the blame rests with the Dems, but the party that is supposedly for free enterprise, private property rights, and limited government continues to cave again and again, if not lead the way down this dark path.
Days like these make me inclined to make the pyrrhic Libertarian vote.
I’m with you. The lesser of 2 evils hasn’t gotten us very far. In fact it kind of drags us inch by inch the opposite direction. I guess the alternative would be to have the other side drag us foot by foot, but I’m not inclined to go that way no matter who’s in power. I’ll probably vote Constitution Party. I’m in California so it’s not like it matters lol.
Insurance companies used to just insure houses from say, fire and flood.
The housing bubble lead to new securities that were based on home loans. So you bought a bond and as long as everybody paid their mortgages, you got interest on the bond. Some bonds were based on risky mortgages and the people buying these risky bonds bought insurance on the bonds, in case people stopped paying mortgages. That way, they got interest on the bonds, but if the bonds defaulted because people stopped paying the mortgages, they still got paid off on the bond by having them insured.
AIG decided to start selling insurance on the risky mortgage bonds. Housing crashed. Many people quit paying their mortgages. The risky bond holders lost money on their bonds and AIG had to pay off on the insurance on the bonds. They lost tens of millions of dollars. They lost so much money that the rating agencies like Moody’s and Fitch downgraded their company ratings, which downgraded the bonds they held.
I don’t know what happened next except that the downgrade on AIGs ratings required them to make an immediate payment of $40 billion or go bankrupt. I don’t know if the $40 billion was payable to the insured parties, or to whom.
AIG couldn’t raise the massive sum and was going to have to declare bankruptcy, which could have ultimately lead to a world-wide depression. It gets very complicated, since a lot of AIG’s debt was held by China and Russia. The key is, if AIG defaulted on China’s debt, then China might retaliate by dumping US dollars or US T-bills. Something painful like that — the kind of trigger than can set off a worldwide panic and cause a depression.
That is the way I understand it but since I am NOT a financial genius, I’ll leave it to them to correct all of my many mistakes, I am sure. But I do appreciate that when folks ask a question that has a complicated answer, I do my best to try to explain it in layman’s terms most people can follow. I give up a little precision for clarity, but understanding some information clearly is better than not understanding a very accurate and precise post.
Hopefully someone will correct and clarify the errors or omissions in my explanation. It is the best I can do.
I forgot to answer half your question.
No, it wasn’t Ike or any insurance related financial problem that crushed AIG. They were very solid on the insurance side. The did not have unusually high payouts or anything of the type. It was merely these derivatives that ultimately bankrupted them. They were actually a very healthy corporation, but got caught in a money squeeze, kind of like if you lost your wallet or purse. You have the money in the bank but you can’t get to it in time to prevent a catastrophe, so you end up taking the catastrophe.
Imagine a robber telling you to give him $100 and he’ll go away or don’t and he’ll kill you. You don’t have a hundred, so he kills you. All the money you have in the bank or in your 401(k) or your home equity does you no good because you need that $100 at that moment or you will die. That was AIG. They had money in the bank but not on them, and it was pay up or die.
But no, it was not insurance problems that crushed them. It was the massive losses from derivatives because the housing bubble collapsed. If you see the term CDS for Credit Default Swap, that is what killed them. They lost a lot of money on CDS’s, not fire or flood or car accidents.
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