If you are like me, you are having a hard time keeping track of all the billions being handed out to corporations these days. Remember when we just worried about subprime issues spreading to other types of mortgages? Oh that it had only stopped with the mortgage industry. Here’s a bailout summary from Mark Hiltzik of the Los Angeles Times: [Thanks L!]
So far this year, the federal government has put up nearly $30 billion to avert a major financial default by the investment bank Bear Stearns; committed to investing up to as much as $200 billion in preferred stock of the loss-plagued finance giants Fannie Mae and Freddie Mac and at least $5 billion in their mortgage securities; and agreed to provide an emergency loan of $85 billion to American International Group Inc. in return for an ownership stake of as much as 80 percent in the stricken insurance giant.
Tuesday’s helping hand to AIG bailed out not only that company, which was contemplating a bankruptcy filing as early as Wednesday, but also countless trading partners of the company, including investment banks that had failed to raise the massive loans themselves.
This year’s bailouts add up to an unprecedented surge of direct financial intervention by the government in the nation’s private sector — a cornucopia of handouts and guarantees dwarfing the rescue of the savings and loan industry in the 1980s, which ended up costing taxpayers $124 billion.
This does not look to be the end either. Hiltzik points out that Congress is considering a loan program between $25B and $50B for auto makers as well.
Lest we think that the government is passing out money to just anyone however, remember one corporation was turned down: [Gee guys, thanks for SOME restraint.]
Investment bank Lehman Bros. Holdings Inc., which was refused a bailout by Treasury Secretary Henry M. Paulson last weekend and filed for bankruptcy protection Monday.
Hiltzik quotes John Lapp, a professor of economics at North Carolina State University as saying, "They’re essentially saying they’re going to put a floor under the market."
The government may find that the floor has a trap door- and billions are about to be poured down it.
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Now it looks like the FDIC may need a bailout and the taxpayer is becoming the lender of last resort: [Hat tip to L.]
I guess they expect us to add a new line item to the monthly budget:
It’s a good thing the American taxpayer has deep pockets, or this could be worrisome.
this is insane.
Where are the CEOs funds? Why aren’t all of the Executive Teams for these banks being tapped first? Granted I doubt most of them have billions of dollars, but they sure don’t deserve to keep anything they’ve made outside of the company stock. I know the deal with CEOs has evolved to be something of a you scratch my back and I’ll scratch yours, but as I understood it in my naive way; It used to be that the C{E,T,F,O}O were given an extremely high amount of compensation (both cash and stock) because they took on the highest risk of running a company.
If this is the case, WHY haven’t any of the CEOs been hauled into their bank and forced (i’m not opposed to at gun point either at this time) to withdrawl all of their funds that isn’t tied into stocks or bonds?
They failed – being fired isn’t enough for these folks that went to the blackjack table lost it all and now expect me to settle with the house. If an engineer gambles with a faulty product causing a huge loss, he might go to jail, get sued, and definitely lose his P.E. license. If a doctor gambles with a knee jerk diagnosis causing death, he’s sued for malpractice.
I agree with DianaK, this entire situation is insane.
(Anti-Spam Word: “boom”)
The housing and financial meltdown are merely symptoms of a much greater problem; America’s economic basis was never sustainable long term.
Exponential growth and infinite consumption of finite resources are mathematically impossible in a finite world.
Our system of finance is based on compounding interest which creates the need for exponential growth of the money supply. As with all exponential assumptions in a finite environment, there is an impenetrable barrier for continuance. We have arrived at the wall.
Welcome to the United States of Canada. Hey while you guys are at it, can you bail out our national airline again?
Igor says ‘collapse’. Sage.
So the blog is just “Doom”? My word from igor is collapse. Seems right.
Why aren’t we hauling in the CEOs? Because politicians won’t go after their cousins. Both are stealing money from the public, but politicians do it under the pretext that people voted for them, while CEOs do it under the pretext they were hired for their ‘skill’.
All it says to me – it’s easy to be rich if you have no ethics.
As many of you know I am a raging housing and market bear. However, this deal with AIG will prove to be good for the taxpayer. AIG is an umbrella company with over 40 insurance units. 38 of them are performing great and generating $8-12 billion a year. The two units that are failing, the biggest is AIG Financial Services, are the ones that are highly exposed to failing mortgage securities. However, most of that exposure will be short-lived. Unless this economy truly falls into a second depression, and we’re talking bread lines, riots, political upheaval type depression, then the units will recover. Albeit they will likely lose about $40-$100 billion, but the company will survive. If you take out those two failing units, the market cap for AIG would still be about $100 billion+. I think that by 2010-2012 the taxpayer will make out well when the stock is sold off. The short term benefit is the slow down in the financial ripple effect impacting other companies, and evetually our economy.
Tobby,
I would agree if this was an isolated event. Taxpayers will make out by 2012? The boomers will be coming on line like ants at a picnic in 2012 and require funding beyond our ability to collect.
What about housing, auto makers, airlines, tech, and more banking failures? This is not a micro problem. Our entire system of economics is failing one sector at a time. What will bring it back…more immigration? Larger cities? More cars? Print more money?
We have reached the apex for the premise of debt capitalism. Saving AIG won’t change that.
metroplexual:
So the blog is just “Doom”? My word from igor is collapse. Seems right.
We had a special theme going on Monday, and it ended up going just a little longer than expected.
Tobby: Unless I see a dividend or shares of stock in AIG on my income statements I don’t believe this will be good for the taxpayer.
I do get your point, if things turn around the government could actually pay down some debt, but I’ll believe it when I see it.
38*12 billion = 456 billion. Why do they need 85 billion right now, according to what you say AIG is stinking rich.
Also I heard the ousted CEO gets about 47 million when he walks out the door for good.
When your government is in the business of promoting and rewarding stupidity ..
Welcome to the United Socialist State Republic of America
Where profits are privatized and losses are socialized.
well guys, it’s beginning to look like that last one was indeed a bridge loan too far …
“S&P’s Chambers: Pressure building on AAA rating”, by Walden Siew, Reuters, September 17, 2008.
Excellent.
When I studied the Great Depression in college, I always wondered whether it really would have been better if the government really tried to prevent it.
Now I get to find out.
Toysarefun, No that profit is not per unit, that is for all of AIG except the failing units. This really is the (MUCH) lesser of two evils.
I agree that the Fed should have taken 100% of the company, but this was the best deal without extensive stockholder litigation (bankruptcy). There have been several CEO changes since Greenburg left, so I am not really sure if the current guy is to blame. His compensation last year was projected at $300 million over 4 years, so this is a pay cut.
We can argue the merits of free market policies until we are blue in the face. Yes, the Republicans are increasing governement AND the deficit at an incredible rate. This amuses me to no end. Do we need some Democrats to restore sound fiscal policies?
However, placing blame right now is like arguing over who put a hole in the bottom of the boat. We are all in the same boat, and need to solve this problem as there are more serious ones likely to come.
As a side note some very conservative pension fund managers with decades of MBS background told me almost a year ago that if the Fed would backstop the insurance companies (AIG, MBAC, etc.) that the bleeding would slow considerably, and allow time for the market to digest it’s losses. I think that they were correct. I just hope it isn’t too late.
Chris Whalen’s gang has just published a long and thoughtful piece about the present festivities:
“The Crisis of Confidence and the Banks”, Institutional Risk Analytics, September 16, 2008.
DianaK,
Marion King Hubbert the renowned American geophysicist who lived through the Great Depression had this to say about a recurrence;
“We are not in the position that we were in 1929-30 with regard to the future. Then the physical system was ready to roll. This time it is not. We are in a crisis in the evolution of human society. It’s unique to human and geologic history. It has never happened before and it can’t possibly happen again.”
As you stated above,we are about to find out and my money is on Mr. Hubbert.
DainaK, Sorry to be off topic, but I can not find your last post to me. You said something to the effect, “sorry, but Excuuuse me for not believing you …?”
Oh boy, why would I lie?
What do I have to gain?
As I have posted before, rates will go negative….? And real rates, margins explode up. (5-20T reached 90!)
Yes, real investors paid the fed to hold money today. Negative yield.
Look at the T.Bill rate for 30 and 90 days.
Any one see a big difference in price vs the day before or month before?
Focus on todays average yield for tbills. 90 day t.bill …. .03% (thats todays average yield) that would mean sometime today that rate was even LOWER! It was negative,
http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
Back to your dis belief on a MTG below 5%:
I am not sure you understand what an “average” means but to get an average 5.23 for 30 days, you would have to have that yeild BELOW 5.23.
But lets go here:
The 90 day delivery of a Fnma Mortgage.
To be Clear, a 30 day delivery is much lower than a 90 day price. But for now, in June of 2003 the delivery average rate to FNMA was 4.87, for loans with a 90 days delivery to FNMA.
https://www.efanniemae.com/sf/refmaterials/hrny/hrny30.jsp
Again, How would I know about CapitoL Commerce if I had not lived through its demise?
What really makes me mad is the money that these CEO and corporate people are walking away with. Somebody said insanity, yes I agree.
Igor says BANKRUPT
“The move violated generally accepted accounting principles and enabled Raines and other top executives to collect a combined $27.1 million in bonuses, the regulator says.”
Walk down memory lane;
http://seattlepi.nwsource.com/business/197252_raines29.html
Fannie Mae fallout could be huge
Friday, October 29, 2004
This has been known for 48 months!!!
We are almost at the full cycle inflexion point of September 21.
“There could be an awful lot of damage; it could be a Pandora’s box that we have here,” he said.” September 22, 2004
Fannie Mae stock stumbled after the oversight office went public with its report on Sept. 22, falling 9.8 percent through Oct. 12; the shares closed yesterday at $70.25.
The fallout in the financial markets may have only just begun, said Dreman, who manages $11 billion. “There could be an awful lot of damage; it could be a Pandora’s box that we have here,” he said.
Franklin Delano Raines (born January 14, 1949 in Seattle, Washington) is the former chairman and chief executive officer of Fannie Mae who served as White House budget director under President Bill Clinton. He is currently employed by Barack Obama’s Presidential Campaign as an economic adviser.
sorry for the political plug
Regardless of whether you in favor of interventions or agency creations, what a time for Congress to be adjourning for the year.
Coffee -
Here’s a stanza from Service – A Conflation (Dec 6, 2007) which was my major project for ENGL 4477, “Writing Poetry (Advanced)” at the local university. I don’t think I ever satisfactorily explained to them what this was about.
97.36 on Monday,
97.08 Tuesday,
96.85 Wednesday,
96.60 Thursday…
Those are the Eurodollar prices for December08 delivery!!!
Rates have gone up .75% in 4 days, that is scary stuff. That price should close to 98.00
100 – price = rate
TED spread is back with vengeance
spam word; crash
FYI:
“The TED spread measures the difference between the three month US Treasury Bill and the three month Eurodollar Future. Elevated readings in the indicator indicate an increased level of risk aversion in the market, as investors flock to short term T-bills, which due to their credit quality and short time horizon, are considered risk free, while Eurodollar futures are more representative of the credit quality of corporate borrowers.”
3 month T.bill hit Zero on 9/17/08 and that is a fact DianaK.
What a disaster. The free market was lowering rates. That is what is needed. Big Brother thinks it knows best. Result. Rates soaring. Creating a bigger disaster. How long can big brother lift the world? No one, is bigger than the market.
Look at the spreads. Look at the TED.
Back in the day, this was called the rail road spread. This measures the creating of money. When T.Bill and Euros trade parallel to each other the trains runs smooth. What the fed has done is derail the train using the these tracks.
Paulson is trying to socialise capitalism? This should collapse the economy since US is not a socialist country.