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Fed to give AIG $85 billion loan and take 80% stake[Done Deal]
IHT ^ | 17 Sep 2008 | Michael J. De La Merced and Eric Dash Published:

Posted on 09/16/2008 4:49:39 PM PDT by BGHater

In an extraordinary turn, the Federal Reserve agreed 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.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for the company to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, AIG was expected to be forced to file for bankruptcy protection.

The need for the loans became necessary after the major credit ratings agencies downgraded AIG late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.

Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and AIG's request for help from the Fed of just a few days ago was rebuffed.

(Excerpt) Read more at iht.com ...


TOPICS: Business/Economy; Government
KEYWORDS: aig; economy; federalreserve; govwatch; housingbubble; loan; ronpaul
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To: Toddsterpatriot
When the government sells that debt, either (1) it sells Treasury debt paper (Notes, Bills and Bonds) to third parties, or (2) it deposits (directly monetizes) that debt paper with the Federal Reserve, in exchange for Federal Reserve Checks, which can be deposited at banks for money.

However, the Treasury debt paper sold to third parties will end up passing through the Fed as well, when it is eventually cashed in for money (dollars). Either the Treasury debt paper will be cashed eventually in at a bank, which will deposit that paper with the Federal Reserve as reserves for more money to loan out, or else that Treasury debt paper will be returned to the Treasury Department for the original money, leaving the Treasury Department back at square one, with debt paper it can either (re)sell, or immediately monetize.

By whatever circuitous path it takes, our national debt becomes dollars. It's dollars we spend and dollars that are the reserve currency of the world's financial system. The (private) Federal Reserve has the monopoly on creating dollars, and it does so, in considerable part, in exchange for Treasury debt paper. The American tax payer pays the interest on that debt.

Furthermore, the Federal Reserve in turn uses those Treasuries as reserves in its fractional reserve banking system, creating about $10 of new private debt for each $1 of reserves. So for each dollar of debt that our government has created through issuing Treasury debt paper, some ten dollars of private debt (with typically higher interest rates) are supported as well.

For those more highly leveraged institutions (which seems to include all the major banks, investment firms, insurance companies and hedge funds in the headlines these days) even more debt (and attendant income and risk) is supported.

So, yes, the Fed certainly doesn't earn all, or even most, of the interest that the government pays on its debt. Most of that interest goes to the other investors, large and small, holding that debt paper. But eventually, all that debt paper (Treasuries) is exchanged for dollars (whether actual paper dollars or electronic bank credits), and it is the Federal Reserve that has the monopoly on doing that, by the 1913 Federal Reserve Act.

So, yes, the Federal Reserve has a lot to do with our debt. It monetizes it, and also uses it as part of the asset base for its fractional reserve banking system. Sorry.

Unfortunately, of late, that wasn't nearly large enough an asset base to satisfy the greed of our fine bankers, so they set about handing out mortgages to every Tom, Dick and Harry who could fog up a mirror, and then turning that mortgage debt paper into more fictitiously rated AAA securities which could be used as reserves for more debt.

That would be OK, accept that they did it on such a grand scale as to be able to blackmail us into backing that toxic waste with yet more U.S. Treasury debt, which will eventually, as that debt paper winds through the above circuitous paths, dramatically inflate our money supply and lower further the value of our savings, investments and income streams from such programs as Social Security.

If you owe the bank a million dollars, they own you.

If you owe the bank a trillion dollars, you own them.

AIG, Fannie and Freddie p0wn3d the U.S.

201 posted on 09/16/2008 11:25:50 PM PDT by ThePythonicCow (By their false faith in Man as God, the left would destroy us. They call this faith change.)
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To: sandyeggo

The Fed holds the stock as collateral. They can sell their collateral. This will need to happen in the near future, so America can once again own this company.


202 posted on 09/17/2008 12:26:13 AM PDT by ritewingwarrior (The real war on terror needs to be fought against Socialism.)
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To: AuntB
AIG, Lehman, none of their CEO’s are going to be hurt.

Lehman's CEO lost all $500 million or so that he had in Lehman stock, as well as his job and most of his reputation. He's not quite unscathed.

I don't know about AIG's current CEO, but Hank Greenberg, the guy who ran it for 35 years, has lost more than $3 billion. He's been hurt pretty badly by this.

203 posted on 09/17/2008 1:20:18 AM PDT by Arguendo
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To: Arguendo; AuntB
You are very correct ...the CEOs were hurt quite a bit as well. Not only financially (losses ranging from the tens of millions to the hundreds of millions), and also (in some ways just as importantly ....to them) in terms of their egos (a lot of these people stopped working for money quite some time back).

However, I think what AuntB was saying is that these guys may have lost quite a bit, but losing 600m and being left with 'only' 120m is FAR better than some poor chap losing 600,000 and only being left with 12,000. All the principals past and present (ranging from S. Oneal to H. Greenberg) have had financial hits, but none of them will be wanting for money. They got hit by the broadside, but the effect on Joe Citizen is quite different. Joe Citizen will not be able to walk away with tens to hundreds of millions.

So you are both right. You are right in that the CEOs and other principals also got affected (and lost many millions, and in the case of Greenberg over a billion), but AuntB is also right in that while the individual magnitude for loss for the CEOs may be higher than that suffered by joe Citizen, the truly applicable impact on Joe Citizen will be far higher. Sure, Joe Citizen may 'only' have lost a several hundred thousand retirement nestegg while Hank lost over a billion, but Hank is still fabulously rich while Joe is left with a (real) big zero.

Anyways, it will be interesting to see how all of this unwinds.

204 posted on 09/17/2008 4:12:56 AM PDT by spetznaz (Nuclear-tipped Ballistic Missiles: The Ultimate Phallic Symbol)
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To: Arguendo; AuntB
Lehman's CEO lost all $500 million or so that he had in Lehman stock, as well as his job and most of his reputation. He's not quite unscathed.

I don't know about AIG's current CEO, but Hank Greenberg, the guy who ran it for 35 years, has lost more than $3 billion. He's been hurt pretty badly by this.

Precisely, the upper management of these companies will be hit very hard personally. However, unlike Enron or Worldcom, there is no indication that they violated any law.

Worldcom and Enron created a populist and ignorant mindset among some that any time a large corporation fails, its senior executives should go to prison. This is simply not true, there is no law against bad management; the executives at Enron and other companies are in jail because they falsified financial records to make their companies seem healthy, this is not the case with AIG or Lehman.

205 posted on 09/17/2008 5:31:37 AM PDT by wagglebee ("A political party cannot be all things to all people." -- Ronald Reagan, 3/1/75)
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To: ThePythonicCow
or (2) it deposits (directly monetizes) that debt paper with the Federal Reserve, in exchange for Federal Reserve Checks, which can be deposited at banks for money.

No matter how many times you repeat this error, it still won't be true. The Fed does not buy securities from the Treasury. Sorry.

By whatever circuitous path it takes, our national debt becomes dollars.

The Treasury borrows dollars, so of course the debt is measured in dollars.

The (private) Federal Reserve has the monopoly on creating dollars, and it does so, in considerable part, in exchange for Treasury debt paper. The American tax payer pays the interest on that debt.

The government borrows dollars and of course pays interest on those borrowings. Which has nothing to do with the Fed. Sorry.

Furthermore, the Federal Reserve in turn uses those Treasuries as reserves in its fractional reserve banking system, creating about $10 of new private debt for each $1 of reserves.

The Federal Reserve does not create private debt. The Federal Reserve does not create public debt. Sorry.

So, yes, the Fed certainly doesn't earn all, or even most, of the interest that the government pays on its debt. Most of that interest goes to the other investors, large and small, holding that debt paper.

Glad I could straighten you out on this.

But eventually, all that debt paper (Treasuries) is exchanged for dollars

Bond buyers used dollars to buy the debt in the first place. Of course, when it matures, they receive dollars. They also receive semi-annual interest payments that are dollars.

206 posted on 09/17/2008 5:41:02 AM PDT by Toddsterpatriot (Let me apologize to begin with, let me apologize for what I'm about to say....)
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To: Arguendo
"Lehman's CEO lost all $500 million or so that he had in Lehman stock, as well as his job and most of his reputation. He's not quite unscathed."

Except, Richard S. Fuld, Lehman's CEO, received $22 million in 2007 as a bonus: "As recently as March, Fuld was awarded a $22 million bonus for 2007 -- a generous pay package to be sure, but one that also reflected a year in which the bank's net profit had risen 5 percent to a record $4.2 billion."

How did a company go from recording a record profit to busted broke in a few mere months??

He is hardly scathed as he still walks aways with that $22 million and I am sure millions more since he has worked for Lehman since 1969.

207 posted on 09/17/2008 5:58:06 AM PDT by CodeToad
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To: Toddsterpatriot
I wrote: You replied: From Wikipedia: United States public debt:

The mechanics of U.S. Government debt

When the expenses of the U.S. Government exceed the revenue collected, it issues new debt to cover the deficit. This debt typically takes the form of new issues of government bonds which are sold on the open market. However, the debt can also be monetized by which the Federal Reserve creates an entry on its books to credit the US Government for an amount equal to the dollar amount of the bonds the Federal Reserve is acquiring.

... No matter how many times you claim I am in error, you are still wrong. The Fed does buy Treasuries. Sorry.
208 posted on 09/17/2008 7:43:55 AM PDT by ThePythonicCow (By their false faith in Man as God, the left would destroy us. They call this faith change.)
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To: CodeToad
Except, Richard S. Fuld, Lehman's CEO, received $22 million in 2007 as a bonus

Keep in mind that much of that $22 million was in options and restricted LEH stock that wouldn't vest for years. And at LEH even more than most companies there was a culture discouraging employees from selling their stock. So his pay package was worth $22 million at the time, but he's lucky if it's worth a fraction of that now.

209 posted on 09/17/2008 8:00:49 AM PDT by Arguendo
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To: Arguendo

“Keep in mind that much of that $22 million was in options and restricted LEH stock that wouldn’t vest for years.”

Do you have a reference on that or are you guessing because all reports indicate that was a cash payment.


210 posted on 09/17/2008 8:11:08 AM PDT by CodeToad
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To: ThePythonicCow
However, the debt can also be monetized by which the Federal Reserve creates an entry on its books to credit the US Government for an amount equal to the dollar amount of the bonds the Federal Reserve is acquiring.

The Fed does not buy securities directly from the Treasury.

Chairman Greenspan was eloquent in 1991 in opposing the Treasury's proposal that would authorize the Federal Reserve Banks to lend up to $25 billion to the FDIC to absorb losses sustained by the Bank Insurance Fund in resolving failed banks. He stated: "Not only would use of the Reserve Banks for funding the BIF serve no economic purpose, it could create potential problems of precedent and perception of the Federal Reserve. In particular, the proposal involves the Federal Reserve directly funding the government. The Congress has always severely limited and, more recently, has forbidden the direct placement of Treasury debt with the Federal Reserve, apparently out of concern that such a practice could compromise the independent conduct of monetary policy and would allow the Treasury to escape the discipline of selling its debt directly to the market. . . . In addition, if implementation of the proposal created a precedent for further loans to the BIF or to other entities, the liquidity of the Federal Reserve's portfolio could be reduced sufficiently to create concerns about the ability of the Federal Reserve to control the supply of reserves and, thereby, to achieve its monetary policy objectives" (FRB June 1991. pp. 435-36).

The Fed does buy Treasuries.

You bet, from Primary Dealers.

211 posted on 09/17/2008 9:53:08 AM PDT by Toddsterpatriot (Let me apologize to begin with, let me apologize for what I'm about to say....)
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To: BOBTHENAILER

How do ya git a “wet wit?” Is it BOOZE???


212 posted on 09/17/2008 10:24:43 AM PDT by SierraWasp (I'm not against the environment, just GovernMental EnvironMentalism!!! (our new state religion))
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To: ThePythonicCow
The Fed doesn't buy debt directly from the Treasury. It buys Treasury debt from primary dealers who may or may not intermediate those purchases for downstream banks.

The Wikipedia entry you cite could be interpreted to show that the debt is purchased directly from the Treasury. That's why Wikipedia is a poor source.

213 posted on 09/17/2008 11:49:50 AM PDT by groanup ("Always buy stocks after a spectacular bankruptcy")
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To: Toddsterpatriot
Man Toddster,

I can't believe you are still defending this system. Everything the worst doomsters is coming true. I hope this ends with central bankers hanging from lamp posts, like Mussolini.

214 posted on 09/17/2008 4:16:17 PM PDT by FightThePower! (Fight the powers that be!)
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To: FightThePower!
I can't believe you are still defending this system.

I'm defending the system? I thought I was correcting someone's faulty understanding.

I hope this ends with central bankers hanging from lamp posts

Or energy traders.

215 posted on 09/17/2008 4:21:30 PM PDT by Toddsterpatriot (Let me apologize to begin with, let me apologize for what I'm about to say....)
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To: ThePythonicCow

No comment on #211? LOL!


216 posted on 09/18/2008 4:08:52 PM PDT by Toddsterpatriot (Let me apologize to begin with, let me apologize for what I'm about to say....)
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To: CodeToad
This is a little late--I haven't been back to FR in a while--but here you go:

Lehman's Fuld gets $22 mln in fiscal '07

As far as the company going from a profit to bankruptcy within a year, broker-dealers are completely different than ordinary companies. Lehman's operating units were likely still profitable (which is why Barclays is buying some of them), but because the company was so highly leveraged even a small fall in the value of its assets was enough to drive, combined with uncertainty that make it very hard for it to get needed loans, was enough to drive it into bankruptcy.

217 posted on 09/21/2008 8:55:43 PM PDT by Arguendo
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To: Arguendo

Thanks.


218 posted on 09/22/2008 7:23:23 AM PDT by CodeToad
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