Guess what, taxpayers? We now own 80 percent of AIG:
Acting to avert a possible financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government an ownership stake in the troubled insurance giant American International Group, according to people briefed on the negotiations.The decision, only two weeks after the Treasury took over the quasigovernment mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank's history.
With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secterary Henry Paulson Jr. and the Fed chairman Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan.
They emerged just after 7:30 p.m. with Paulson and Bernanke looking grim but top lawmakers generally expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by AIG and other institutions does business with [Emphasis mine -- RD].
What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG's its role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means AIG is potentially on the hook for securities that were once considered safe.
If AIG had collapsed -- and been unable to pay all of its insurance claims -- institutional investors around the world would have been instantly forced to reappraise the value of billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt.
"It would have been a chain reaction," said Uwe Reinhardt, a professor of economics at Princeton University. "The spillover effects could have been incredible."
I cannot pronounce on this, because I don't really understand what it would have meant had the US government let AIG go under. Maybe Paulson did the right thing. You tell me. Joe Nocera, speaking on video before tonight's news, says that the fate of AIG matters a lot more than Lehman Bros., or even Fannie and Freddie, because (he indicates) if AIG went under, it really could lead to a collapse of the global financial system.
I find myself furious, though, that the state has to save capitalism from itself. How much money did these AIG bigwigs pocket while they were making risky deals that now you and I have to cover? Who else's Wall Street ass are taxpayers going to have to crowbar out of the crack? Where does it stop? Who holds these financiers responsible for what they've done? How do we keep this from happening again?
This infuriates me, but I swear I don't know who to blame or what real good blame would do. Pyrrho, Karth, what's the answer?
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Not getting a mortgage ? I'd go three sides around the barn to build up the personal savings. Lay off the new wide-screen TVs for a bit. Don't take on new long-term debt if you don't absolutely have to. And for pity's sake, get rid of those silly-ass credit cards ! Get a financial position you can HOLD, and resources you are in control of.
One other thing I'd suggest, and this may surprise some of you: if you've got any frayed family relationships, now strikes me as being a really, really good time to patch them up. Everyone needs someone to watch their back, emotionally, physically and (very occasionally) fiscally. Reassure your kids that you love them. Tell your spouse how much you love them (or that you love them, if you haven't done so in a while). Tell your parents you love them. And follow it up with some actions. It will build some trust and confidence, and THAT is a commodity more precious than rubies, certainly in fishy times like these. "Bare is back without brother to guard it."
But hey, don't take my advice as gospel-truth. Check this all out for yourselves. I'm not a guru or anything like that, certainly not on matters financial !
To coin a phrase: I'm just this guy, you know ?
Your servant,
Lord Karth
Posted by: Lord Karth | September 17, 2008 4:57 AM
Thanks for the Sanity, Lord Karth. Kind of you to buy rounds for the house, much thanks.
A lot of things need to be rethought. It's time to go old-fashioned. Settle your debts. Build a little bungalow, the kind you can practically order in a box (they're still around) and add on rooms as you go. Walk to work, or ride a bike or bus. Sink deeply into extended family. Consider government service.
That's the route I'm taking. Thanks to the Army I am debt free (single soldiers do not pay rent, utilities, or grocery bills, and no soldier pays for health insurance. Also we get paid extra in combat zones, and there ain't much to spend it on here...) With a degree. And the six years of military service counts towards a Federal pension, so I'm working for the government. Be crazy not to, with the state of health insurance out there.
We have a small house and a small mortgage. Our financial adviser told us a while back that we really ought to be in a bigger house. Because math is hard for us journalism graduates, making us rather risk-averse with our investments, and because our small house is big enough for us, we chose to stay put. Boy, am I ever glad we did!
Build a little bungalow, the kind you can practically order in a box (they're still around) and add on rooms as you go.
Could you point me to some examples (or at least a builder name)? As a renter during the ongoing housing crash, I'm considering a home purchase, and I'd like to go cheap if possible.
Consider government service.
Not to sound hypocritical - what you say makes perfect sense, particularly WRT health insurance - but thinking of the desirability of civil service vis-a-vis the private sector brings to mind the America of Pournelle's CoDominium (which didn't end to well). More than a little worrisome....
Democrats blocked Bush’s Fannie Mae and Freddie Mac Reforms because they wanted poor people to buy houses.
''These two entities -Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the
Financial Services Committee.
http://strategicthought-charles77.blogspot.com/2008/09/democrats-blocked-bushs-fannie-mae-and.html
A lot of things need to be rethought. It's time to go old-fashioned. Settle your debts. Build a little bungalow, the kind you can practically order in a box (they're still around) and add on rooms as you go. Walk to work, or ride a bike or bus. Sink deeply into extended family. Consider government service. A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing. I personally feel that AIG bailout will definitely bring positive results for taxpayers. If AIG gets the financing it needs, the taxpayer is actually doing OK. The government is charging such high interest to AIG, and they've got a guarantee of 80 percent of the company, so this may not be a bad deal.
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