The Fed "hopes" A.I.G.
September 16, 2008 8:16 PM   Subscribe

The Fed has decided to bail out A.I.G. with an $85 billion dollar loan deal, which will result in 80% of the company being owned by the government.
posted by aheckler (263 comments total) 11 users marked this as a favorite
 
Privatize the profit, socialize the loss.
posted by mr_roboto at 8:19 PM on September 16, 2008 [70 favorites]


Is the phrase "$85 billion dollar" redundant? I didn't really think about it until it was too late...
posted by aheckler at 8:20 PM on September 16, 2008


Discussion currently in progress
posted by anthill at 8:21 PM on September 16, 2008


It's already helped Australian stocks. So that's good... if you're Australian.
posted by Effigy2000 at 8:23 PM on September 16, 2008


On the other hand, hey, we now own AIG. I'm sure the dividend checks will help a lot of people in need. We can use the stock as collateral for loans. And the billions of dollars they make will help reduce the national debt and lighten our tax loads.

Hooray!
posted by Naberius at 8:24 PM on September 16, 2008 [12 favorites]


Republicans = Communists.
posted by dirigibleman at 8:26 PM on September 16, 2008 [12 favorites]


This is arguably a good deal. If AIG failed it would have triggerd insanity in the markets. Not just CDSs and counterpart bullshit, but everything from corporate liability insurance to your car insurance. The terms of the loan are horrible for AIG and compel it to liquidate assets rather than going to the loan facility. If it's true that the AIG problems are a liquidity issue rather than a capitalization issue, this works. HOWEVER that's quite a big if. Should AIG turn out to be a pig in a poke, the US T-Bill just got downgraded.

I don't know what else the Fed could do really. But what this does represent is the overall failure of the US financial system. It's scary, it's bad, and from this point on the US needs to keep its trap shut when accusing other countries of socialism. The US is now one of the most socialistic nations on earth. It just managed to get there without enacting universal health care or any kind of welfare state -- unless your home is in the Hamptons.
posted by unSane at 8:28 PM on September 16, 2008 [49 favorites]


Not necessarily redundant, aheckler, since it could've been referring to pesos (also $). Which would've been very sneaky on the part of the Fed. Those wily tricksters.
posted by empyrean at 8:29 PM on September 16, 2008 [5 favorites]


What other businesses does/did the US federal government own?

Is this a common thing (obviously I don't mean on the scale of AIG).
posted by Flunkie at 8:30 PM on September 16, 2008


I'm no expert but this seems to be an appropriate function of our quasi-private Federal Reserve.

Believe me, we want the WHEELS TO STAY ON this cart.

Upon further reading on Calculated Risk's comments I've found that the 11%+ interest rate isn't as bad as it appears since this gives AIG a known backstop in negotiating lower rates with other financiers.
posted by troy at 8:30 PM on September 16, 2008


We read this on another site:

"Welcome to America, where the profits are privatized and the losses are nationalized".
posted by An Infinity Of Monkeys at 8:31 PM on September 16, 2008 [24 favorites]


Privatize the profit, socialize the loss.

Do you people have a default opinion key that you just press for various threads? Thread about economy? CTRL P! Privatize the profit, etc.

Can we just paste all the bullshit doomsaying from the existing thread where this is being discussed and then the rest of us can scroll down to the actual intelligent conversation?
posted by spicynuts at 8:33 PM on September 16, 2008 [5 favorites]


OK, an 80% stake means the government -- us -- is by far the majority shareholder.

If so, are we the owners going to give the new CEO and top executives millions in compensation and benefits and golden parachutes for them to use when they screw up?

Oh wait, it's capitalism, so of course "we" -- our government masters who are in turn owned by the rich -- will.

Will "we" insist that AIG actually honor its insurance contracts, or will "we" let it, like so many insurers, drop customers and weasel out of its obligations when customers have the audacity to file a claim?

Oh, of course "we" will.

Because anything else would be called "socialism" and "interference with market forces" -- even though "we the people" are being asked to bail out AIG.

Because if you're not rich or well-connected, government doesn't work for you.

--

I don't care if you vote for Ron Paul or Bob Barr or Barack Obama. Just don't vote for more of this "regulation bad, bailout good" Republicanism. Either vote for a rationally regulated economy or for no regulation and no bailouts.

But the Republican ideal of obscene executive salaries, no oversight, private profits and public costs is nothing less than robbery from the rest of us, written into the law and enforced by the state.
posted by orthogonality at 8:33 PM on September 16, 2008 [84 favorites]


Serious Question: If the company is now owned by the US Government, will there ever be a chance to claim my share of stock? If not, why not?
posted by SteveFlamingo at 8:36 PM on September 16, 2008 [3 favorites]


Right now the Nikkei is up over 2% (240ish).
posted by spicynuts at 8:37 PM on September 16, 2008


I don't know what else the Fed could do really. But what this does represent is the overall failure of the US financial system.

This is exactly right, people. The system, as it has been designed, is failing entirely. You, and your children, are being sodomized by these bailouts.
posted by Malor at 8:38 PM on September 16, 2008 [10 favorites]


I love that question SteveFlamingo I've been asking that very thing for a week now.
posted by nola at 8:38 PM on September 16, 2008




the new CEO and top executives

That would be THE FED. So I doubt they will be getting obscene salaries and golden parachutes.
posted by spicynuts at 8:38 PM on September 16, 2008


Next up, AIG insures the US government against failure in Iraq.
posted by UbuRoivas at 8:38 PM on September 16, 2008 [6 favorites]


What other businesses does/did the US federal government own?

For one thing, AFAICT this is a Federal Reserve operation and not the Federal Government.

The Federal Housing and Finance Agency now controls Fannie Mae, Freddie Mac, while the Federal Reserve now has ~$400B of miscellaneous assets on its books, pledged as collateral for over $400B of US Treasuries it has lent out to institutions needing some temporary liquidity in this pull back.
posted by troy at 8:39 PM on September 16, 2008


The top earners provide the majority of tax revenues, anyway, so quit your whining.
posted by Mr. President Dr. Steve Elvis America at 8:42 PM on September 16, 2008 [1 favorite]


Well, rather, I should have said -- the system as it has evolved, because it sure wasn't designed.
posted by Malor at 8:43 PM on September 16, 2008


If the company is now owned by the US Government, will there ever be a chance to claim my share of stock? If not, why not?

The bail out is a LOAN with interest, so, though it is not perhaps the comforting thought you wanted, the interest earned by 'the US Govt' on this deal may be used to reduce the impact of the other actions the Fed has taken or to offset some debt.
posted by spicynuts at 8:43 PM on September 16, 2008


strange days have found us
posted by philip-random at 8:44 PM on September 16, 2008 [3 favorites]


It's also worth pointing out that the US government isn't just the source of money for roughly 60% of the loans in the housing market, it's just become a signfiicant insurer of those loans.

Conflict of interest much?
posted by Malor at 8:44 PM on September 16, 2008 [1 favorite]


This is arguably a good deal.

Jesus fucking christ. There's no way that the Fed stepping in to save their ass is a good deal. A few greedy fuckers who got our financial system on this precipice can say "OOPS, we fucked up", and the rich Uncle Sam comes in and saves them. It's fucking bullshit that things got in this situation. It's one thing if you over-extend yourself, and put yourself into financial ruin, it's a whole different thing when you mis-manage a company so bad you potentially put the world into financial ruin. Fuck that, and fuck the assholes on Wall Street who got us here, and fuck the assholes that were supposed to be protecting us from this shit.

Grrrrr, I can't believe the whiny shit that this is a good deal. What it is is one of the least painful outcomes. There's nothing good about it.
posted by Eekacat at 8:45 PM on September 16, 2008 [16 favorites]


If the company is now owned by the US Government, will there ever be a chance to claim my share of stock? If not, why not?

No. It also turns out that you can't move into a courthouse, or borrow a police car when you need to drive somewhere. Go figure.
posted by Mr. President Dr. Steve Elvis America at 8:46 PM on September 16, 2008 [11 favorites]


You, and your children, are being sodomized by these bailouts.

How so?

The system, as it has been designed, is failing entirely.

I agree with this, but my analysis centers on the unregulated nature of the credit default swap insurance sector. It is an important aspect to understand how such points of failure were allowed to exist and operate as such in the current system.

Michael Shedlock joked almost two years ago:
Unfortunately we can’t start cutting interest rates just yet because we are also frightened by the massive speculation in the financial markets with stock buybacks, mergers, leveraged buyouts, and trillions of dollars in derivatives floating around some of which we do not even know who the ultimate guarantor is. We are hoping but do not know that the ultimate guarantor of these derivatives is not Madame Merriweather's Mud Hut in Malaysia.
The core of the issue is assuming laissez faire operation of critical sectors of our economy was a valid form of governance. IMO this has been demonstrated to be Not The Case, since in the end we are still monkeys and can get ourselves into very unpleasant situations that require a higher order solution than what got us there.
posted by troy at 8:47 PM on September 16, 2008


SteveFlamingo -- Yea, you won't get your individual share, but then again, you can't securitize your future Social Security payments, so it's nothing new.

For those complaining about the lack of regulation on these chumps, please note: a) everything that has failed so far was doing nothing outside of current regulations b) the risk-taking was encouraged by the quasi-government entities in the first place c) "unregulated" hedge funds have been doing relatively well.
posted by FuManchu at 8:52 PM on September 16, 2008


CAN I HAZ SOCIALISM? please?
posted by afu at 8:52 PM on September 16, 2008


Oh good another thread for people to rage against something they don't understand.
posted by smackfu at 8:53 PM on September 16, 2008 [8 favorites]


The bail out is a LOAN with interest

The bail-out is indeed a loan, but it's a loan that is given in exchange for warrants, which give control to the Fed. It is true, however, that the bill to taxpayers could be less than the $85b face value of the debt. I suppose it's also possible the government could actually profit in the long run, but I'm not holding my breath...

Serious Question: If the company is now owned by the US Government, will there ever be a chance to claim my share of stock? If not, why not?

Really -- A serious question? Serious answer: You'll get your stock on the same day you get your share of the nuclear arsenal your government owns.
posted by blue mustard at 8:54 PM on September 16, 2008


You would have thought AIG had insurance to cover this sort of thing.
posted by ALongDecember at 8:54 PM on September 16, 2008 [13 favorites]


The top earners provide the majority of tax revenues, anyway, so quit your whining.

Absolutely. Plutocracy fuckin' rules.
posted by Missiles K. Monster at 8:54 PM on September 16, 2008 [5 favorites]


As suggested by a few of the comments on the Brokergeddon thread, the hidden culprit here in AIG's swift demise may be hurricane Ike (huge swaths of TX and the Houston area are suffering right now)--and the massive cost Ike's damage was sure to bring insurers. There's a metaphor in here, that's for sure. On a related note, the insurance premiums in Florida and the Gulf Coast states in the wake of Katrina went way up (they went way up in the wake of Andrew as well), and the result was that a lot of folks already struggling to pay their (sub-prime) mortgages could not afford their premiums. I am curious to see if the rebuilding contracts for Houston and Galveston go immediately to Halliburton and friends.
posted by ornate insect at 8:55 PM on September 16, 2008


What are the benefits of being an AIG stockholder? Do I get free a tote bag and coupon packet?
posted by Lord_Pall at 8:57 PM on September 16, 2008


I thought if socialism ever came to America we would at least get good public schools and some awesome ass libraries out of it so I'm honestly feeling a little gypped right now.
posted by The Straightener at 8:58 PM on September 16, 2008 [11 favorites]


For those complaining about the lack of regulation on these chumps, please note: a) everything that has failed so far was doing nothing outside of current regulations

Hence the argument that current regulations are insufficient.
posted by mr_roboto at 9:01 PM on September 16, 2008 [8 favorites]


If you're looking to cast blame, I think we can all agree on the rating agencies. They've got their fingerprints on two distinct things here:

1) They completely screwed up the ratings on CDOs, so you had AAA bonds failing, which defeats the point of ratings in the first placfe.

2) They downgraded AIG which caused an immediate cash crunch and turned it into an urgent situation.
posted by smackfu at 9:01 PM on September 16, 2008 [3 favorites]


It's worth noting that there's no guarantee that this buyout will even save AIG. Remember, over the weekend, the speculation was that AIG would need a $50 billion buyout to remain solvent. Then yesterday it was $75 billion needed. Today, the government offers $85 billion. What happens if tomorrow, it turns out AIG needed $100 billion to stay solvent? All it'll take is another run on AIG's stock (you know, the stock Warren Buffet is pointedly not buying) and AIG will need more money. A lot more money.

It's not like their holdings are going to magically get any better - they're up to their necks in bullshit subprime mortgage instruments and worse. And their plan to repay this loan is... selling those bullshit mortgage instruments? They might as well try to do it by selling cotton candy. They would have more luck.

And remember - AIG being propped up only barely helps WaMu from crashing, and the odds of WaMu surviving the week are... low. And if WaMu crashes, oh man, it's gonna hurt.
posted by mightygodking at 9:02 PM on September 16, 2008 [5 favorites]


What are the benefits of being an AIG stockholder?

Actually, the average stockholder will probably see their common stock tank (even more than it already has) as I'm sure the bailout will resemble that of Bear Stearns. The sad part is realizing that the whole point of these bailouts is political in nature; a stopgap measure designed to keep the system from collapsing before the election.

As a taxpayer, I'm appalled. As a voter, I'm motivated.
posted by FormlessOne at 9:02 PM on September 16, 2008 [5 favorites]


For those complaining about the lack of regulation on these chumps, please note: a) everything that has failed so far was doing nothing outside of current regulations b) the risk-taking was encouraged by the quasi-government entities in the first place c) "unregulated" hedge funds have been doing relatively well.

Uh, no. The Commodity Futures Modernization Act explicitly excludes credit default swaps from regulation.
posted by afu at 9:02 PM on September 16, 2008 [2 favorites]


So who has the chart of donations to republicans/democrats for Lemans, Bear Sterns and now AIG? Toss in charts for the buyers, just for yucks.
posted by rough ashlar at 9:03 PM on September 16, 2008


No. It also turns out that you can't move into a courthouse, or borrow a police car when you need to drive somewhere. Go figure.

Alright, fair enough. It'd be a giant mess if we tried to do anything like that. But, if/when AIG does turn things around, is it likely we'd sell the company off? I'd love to see the profits go to fund something for the public, maybe universal healthcare. Although I assume that's unlikely.
posted by SteveFlamingo at 9:05 PM on September 16, 2008


From: What Regular People Can Do to Protect Their Money

"Thompson reminded: In the 75 year history of the FDIC, not a single insured depositor has ever lost a penny."
The aerodynamic integrity of the aircraft was flawless before it crashed into a mountain.

"Perhaps the best thing you can do right now, according to Carmen, is nothing."

Way, way ahead of you.

"Serious Question: If the company is now owned by the US Government, will there ever be a chance to claim my share of stock? If not, why not?"

No, it doesn't work that way. Same reason why you can't claim a share of Amtrak or the Post Office.

"Just don't vote for more of this "regulation bad, bailout good" Republicanism."

Well, the Tennessee Valley Authority was a Democratic thing. Worked pretty well too.
The Dems hated Amtrak though. To be fair, Republicans did too (anti-nationalization of the railroads) but Nixon okayed it so...

I mean I'm with you on the obscene profits and insanity, but over the long haul, I don't know that this can be laid at any one party's doorstep.
FDR bailed a lot, did a hell of a lot of economic intervention.
I'm with you on these Republicans, yeah. But y'know, like a sports team, the players shift, it's the same name, but it's a new team.

(Not, of course, that rich and well-connected folks don't routinely hose folks over using the government and whichever team they can get ahold of that year - sometimes both - and it goes without saying only having the two teams to choose from kinda sucks.)

All that within the scope of this bailout/regulation idea of course. Not generally speaking.
posted by Smedleyman at 9:06 PM on September 16, 2008 [1 favorite]


The top earners provide the majority of tax revenues, anyway, so quit your whining.

"Earner" is a funny choice of words, considering how much of the tip-top of the wealth pyramid is inherited.
posted by rokusan at 9:06 PM on September 16, 2008 [11 favorites]


Strangely, these past days are reminding me more and more of 7 years plus a few days ago ... just less acute. Large towers are definitely crumbling and it's all going to be rather confusing until the dust settles.

Meanwhile, the various misfits, loony tunes and squalid criminals responsible are doing their best to blend in, dressing up in women's clothing, sneaking onto the lifeboats.
posted by philip-random at 9:06 PM on September 16, 2008 [1 favorite]


So, wait. I'm not sure I understand on any meaningful level, and I'm sure I don't understand very deeply.

(1) AIG had obligations that it could not pay off.
(2) The Fed loaned a bunch of money to AIG.
(3) The Fed acquired an 80% stake in AIG.

Right?

So, now, the money that the Fed loaned AIG will more or less immediately go to covering the obligations that AIG had been unable to cover?

And AIG (which is mostly owned by the Fed) has to start giving money to the Fed to cover the loan? So (mostly) the Fed's left hand has to give the Fed's right hand money?

What happens if it can't?
posted by Flunkie at 9:07 PM on September 16, 2008


A question... Is it in China's interests to keep AIG afloat? Are a large part of their American assets insured by this company?
posted by clearly at 9:09 PM on September 16, 2008


a) everything that has failed so far was doing nothing outside of current regulations

yeah, I think that's the problem . . . over-consolidation, over-engineering, and over-stimulation.

IIRC Wall Street was pulling in * 40% * of the S&P 500's earnings in 2006. 2007 featured a $26B bonus pool for Wall Street.

From eyeballing this chart once can see that more loans were made in the past 8 years than the previous 25.

Absent wage inflation, this implies a great consolidation of monetary wealth, if not actual wealth, in fewer hands.

As Ashleigh Brilliant once said, I don't have any solution but I certainly admire the problem.
posted by troy at 9:09 PM on September 16, 2008 [5 favorites]


Well, it's a good deal for me, I bought a bunch of AIG stock for $3.75 a share earlier today.


I figured it would probably end up going to zero, but if it recovered I tipple or even quadruple my money in a few days, making it a pretty good deal even if the likelihood of a bailout was less then 50%.

So now that the government is taking 80% of the company, shares should be worth 20% of what they would have been relative to the market cap of the company right? So if the overall value of the company goes back up to $50 billion, for example, the stock should be worth $10/share right? Or am I missing something here?
posted by delmoi at 9:12 PM on September 16, 2008 [1 favorite]


So, now, the money that the Fed loaned AIG will more or less immediately go to covering the obligations that AIG had been unable to cover?

No, it tells the market that AIG's got a rich uncle that will backstop him if needed.

In common-day terms, AIG's your room-mate and hasn't paid his share of the phone bill in a couple of months. His Stafford loan is coming in next month though, so he can go to Pay Day loans to kite a check through them to give you the cash to make you whole.

AIG has some nice shit -- an cherry car, some nice REI gear, that he can ebay one he decides to get his act together and live within his means.
posted by troy at 9:13 PM on September 16, 2008 [7 favorites]


This is arguably a good deal.

No, not it is not a 'good deal' for the American Citizen.

If AIG failed it would have triggerd insanity in the markets.
posted by unSane at 8:28 PM


Oh, well then. You were talking about the counterparty who is not the American Citizen. Yes, its a fine deal for them.

Ron Paul

Oh how much FUN the debates would have been. Dr. Congressman Paul talking about the money, smaller non-intervening in the market government, the Federal Reserve, pulling the US military out of, well, everywhere and for an extra kick - getting rid of the IRS for individuals (which then would have had a blossoming of small 1 wo/man firms as LLCs everywhere went POOF!) VS talk of hope and change. Odds are the debates would have been over if 'Da Constitution' means what it says or is a 'living document'

But at least it wouldn't have been all the crud that is being slung WRT Mrs. Palin.
posted by rough ashlar at 9:15 PM on September 16, 2008 [1 favorite]


So who has the chart of donations to republicans/democrats for Lemans, Bear Sterns and now AIG? Toss in charts for the buyers, just for yucks.

Well...
Among Obama's campaign contributors are many Lehman Brothers Executives, such as CEO Richard Fuld ($2,300), President Joseph Gregory ($4,600) and dozens of other top Lehman Executives. On June 19th, Lehman shareholders filed suit against Fuld and Gregory for the company’s exposure in the subprime market. In addition to dozens of Lehman executives are Obama's bundlers from Lehman Borthers who have raised top dollar for the campaign. Direct contributions from Lehman Brothers have exceeded $395,000 for Senator Obama.

John Rhea - (over $500,000) Co-Head of Lehman Bros. Global Investment Banking
Mark Gilbert - (over $500,000) Lehman Brothers Senior Executive
Christine Forester - (over $500,000) Lehman Brothers Senior Executive
Theodore Janulis – Bundler (over $100,000) & Lehman Brothers Head of Global Mortgages
Nadja Fidelia – Bundler (over $50,000) & Managing Director of Lehman Brothers
(source)

I'm sure McCain has tons of Wall Street money too, so this doesn't really prove anything except that Wall Street likes to buy politicians from both sides of the political spectrum to make sure they're fuilly covered. If only they were so careful about their other investments.
posted by Asparagirl at 9:15 PM on September 16, 2008


Or am I missing something here?

In liquidations, common shareholders are behind senior debt, subordinated debt, senior preferred issues, and the preferred.

Your gamble may pay off, or you may get the value of a half-used toner cartridge for your investment.

As the proud? owner of 1000 FRE as of today, I'm with you :)
posted by troy at 9:16 PM on September 16, 2008 [2 favorites]


Not just CDSs and counterpart bullshit, but everything from corporate liability insurance to your car insurance.

It's not clear to me how an AIG failure would have affected insurance policyholders. Most of the traditional insurance policies (i.e., the P&C stuff, not the CDS contracts) are written out of subsidiaries, which are regulated at the state level. Unless individual state regulators decided to allow AIG to let capital flow back to the parent company (like NY did yesterday), the policyholders would have been covered by the regulatory capital requirements.

Anyway, if the Fed auctions off the various business lines, it's going to be a feeding frenzy for the healthy insurance companies out there. The life and retirement/annuity business and ILFC, the airplane leasing unit, may be snapped up pretty quickly. There's probably a case to be made that the Fed/Treasury couldn't coerce any financial institutions to participate in a bridge loan to AIG because those companies saw a chance to pick the bones of a dead AIG (like Barclays picking up Lehman's core business after it went BK). I'm thinking Berkshire in particular.
posted by mullacc at 9:17 PM on September 16, 2008


No, it tells the market that AIG's got a rich uncle that will backstop him if needed.
If that's the case, I don't understand why people have been saying things like "AIG would go bankrupt tomorrow without a bailout".

I understand "AIG has a strong chance of going bankrupt sometime soon if a bunch of claims on things it has insured come in".

But why would it have been assured to go bankrupt tomorrow if it's not the case that it had bills that it has to pay tomorrow?
posted by Flunkie at 9:18 PM on September 16, 2008


To be clear, I'm not arguing. Rather, I'm trying to understand, which I know that I currently do not.
posted by Flunkie at 9:19 PM on September 16, 2008


Also, I would like to see them burn. They are primarily an insurance company if I am not mistaken. Insurance by default is based on the trust that current payments ensure future security. If they can no longer provide that financial security, let them crumble.

If AIG was foolish enough to bet their financial security on risky investments, they no longer deserve the responsibility of guaranteeing the financial security of others in any case.

I have no sympathy whatsoever for these investment bankers and insurance companies who have used American capital as monopoly money. If they don't have the motivation to invest that capital wisely, then surely things need to change. Step 1 would be to let the market cull the weak and foolish. Step 2 would be to ensure that those making the decisions are every bit as liable for their investments as the people whose capital and trust they have been toying around with.
posted by clearly at 9:19 PM on September 16, 2008 [1 favorite]


So now that the government is taking 80% of the company, shares should be worth 20% of what they would have been relative to the market cap of the company right? So if the overall value of the company goes back up to $50 billion, for example, the stock should be worth $10/share right? Or am I missing something here?

Well, another way to look at it would be that the government just paid $85 billion for 80%, so the whole thing should be valued at $106 billion. The non-gov't $21 billion is spread among 2.69B shares outstanding.... so actually $8 / share seems about right.
posted by smackfu at 9:23 PM on September 16, 2008


If AIG was foolish enough to bet their financial security on risky investments, they no longer deserve the responsibility of guaranteeing the financial security of others in any case.

You do understand, don't you, that AIG is not a person? Deserve's got nothing to do with it.
posted by Mr. President Dr. Steve Elvis America at 9:25 PM on September 16, 2008


Looks like phase 1 is complete.
posted by blue_beetle at 9:25 PM on September 16, 2008


But why would it have been assured to go bankrupt tomorrow if it's not the case that it had bills that it has to pay tomorrow?

They got a margin call last week to show capacity to back their positions. Without getting this loan their credit rating would be hit, triggering default clauses and requiring their counterparties to immediately exit the relationships they had.

^ this is just my off the cuff impression, and I could be entirely wrong, but I think that's the gist of the crisis.
posted by troy at 9:25 PM on September 16, 2008


the interest earned by 'the US Govt' on this deal may be used to reduce the impact of the other actions the Fed has taken or to offset some debt.
posted by spicynuts


I've heard claims in the past over how 'the US Govt' was not going to be 'on the hook' for expenses.

“The oil revenues of that country could bring between $50 and $100 billion over the course of the next two or three years. Now, there are a lot of claims on that money, but … we are dealing with a country that can really finance its own reconstruction and relatively soon.” - Paul W talking about invading Iraq.

Now, how - exactly is THIS time going to be different?
posted by rough ashlar at 9:27 PM on September 16, 2008 [1 favorite]


But why would it have been assured to go bankrupt tomorrow if it's not the case that it had bills that it has to pay tomorrow?

From the WSJ:
AIG's financial crisis intensified Monday night when its credit rating was downgraded, forcing it to post $14.5 billion in collateral. The insurer has far more than that in assets that it could sell, but it could not get the cash quickly enough to satisfy the collateral demands. That explains the interest in obtaining a bridge loan to carry it through
posted by smackfu at 9:27 PM on September 16, 2008


We use to do this in Canada all the time. We had Petro-Canada, Air Canada, CNR, Teleglobe, all kinds of companies were owned by the Government. The cool thing is that when the winds of change blow the other way, you sell them off on the public market! The Government gets all this free money and the government's pals get hugely valuable assets for pennies on the dollar! It's win-win! In 10 years you'll all be so glad that the government nationalized the finance sector.
posted by GuyZero at 9:28 PM on September 16, 2008 [1 favorite]


Oh good another thread for people to rage against something they don't understand.

Oh good another thread for Market Mandarins trained in Enron-era-finance-speak to layer on the bullshit.
posted by ornate insect at 9:30 PM on September 16, 2008 [18 favorites]


I see it noted that while the Fed loaned the money they did so with assistance from the Treasury. Have they spelled out what percentage of the money was Fed Reserve Money and what percentage was Tax Payer Money? And would the sale of assets pay off the Treasury (tax payer) money first?
posted by aburd at 9:30 PM on September 16, 2008


Maybe Wal-Mart could lend the US government some money. In the first quarter of this year their revenue jumped 10.2 percent to $94.12 billion. Their net income (aka profits?) was $3.022 billion. Nice to know some businesses are doing OK in the USA and all is not gloom...
posted by binturong at 9:32 PM on September 16, 2008


Their net income (aka profits?) was $3.022 billion. Nice to know some businesses are doing OK in the USA and all is not gloom...

The fact that more people are shopping at Walmart doesn't fill me with confidence.
posted by aburd at 9:34 PM on September 16, 2008 [2 favorites]


I thought if socialism ever came to America we would at least get good public schools and some awesome ass libraries out of it so I'm honestly feeling a little gypped right now.

I'm not picky. I'll settle for even one ass library, awesome or not.
posted by adamdschneider at 9:35 PM on September 16, 2008 [5 favorites]


You do understand, don't you, that AIG is not a person? Deserve's got nothing to do with it.

Perhaps you are right about the deserve part. Of course AIG isn't a person, but they are a capitalistic enterprise that should be allowed to fail like every one of their competitors.
posted by clearly at 9:36 PM on September 16, 2008


It's fun to read other boards where this is seen as the government stealing AIG from the stockholders with very little in return. 80% stake in exchange for a loan at an awful interest rate.
posted by smackfu at 9:40 PM on September 16, 2008


Now, how - exactly is THIS time going to be different?

fewer car bombs.
posted by troy at 9:41 PM on September 16, 2008


I don't understand any of this crap at all. All I know is that when Clinton was president, money rained from the sky for me and none of this scary shit happened. YMMV.
posted by Camofrog at 9:41 PM on September 16, 2008 [6 favorites]


Maybe Wal-Mart could lend the US government some money.

It's called buying treasury bonds, and is actually quite common.
posted by delmoi at 9:43 PM on September 16, 2008


should be allowed to fail like every one of their competitors.

The only sensible thing to do is try to compare the costs of AIG failing with the costs of propping it up. I think it's naive to think that AIG's failure would be cost-free to taxpayers who thought they weren't invested in AIG.
posted by Mr. President Dr. Steve Elvis America at 9:44 PM on September 16, 2008 [1 favorite]


It's fun to read other boards where this is seen as the government stealing AIG from the stockholders with very little in return. 80% stake in exchange for a loan at an awful interest rate.

My understanding is that shareholders need to approve this transaction, so it can hardly be called stealing. Of course, their alternative is bankruptcy, so they certainly have reasons to be unhappy with their investment.
posted by blue mustard at 9:44 PM on September 16, 2008


AIG's financial crisis intensified Monday night when its credit rating was downgraded, forcing it to post $14.5 billion in collateral. The insurer has far more than that in assets that it could sell, but it could not get the cash quickly enough to satisfy the collateral demands.
So this entire problem (or at least this immediate aspect of it) is merely due to some legalese contract that AIG had (with who?) that overlooked (or rejected) the possibility of non-cash collateral as "collateral", even in the extreme short term?

Why would the contract (with who?) be written that way?

I could understand it being written such that the other party (who?) had the right to refuse non-cash collateral as collateral, or something like that, but if basically everybody (including the other party (who?)) is confident that AIG has far more in assets than it would take to cover this margin call, why does anybody - in particular the other party (who?) that is holding them to this - care whether it's in cash right now at this moment?
posted by Flunkie at 9:45 PM on September 16, 2008 [1 favorite]


"The top earners provide the majority of tax revenues, anyway, so quit your whining."

Top wage earners, yes. Top richest people? No.

Herbert Simon “social capital” = 90 percent of what people earn in wealthy societies

Warren Buffett- society responsible for much of his wealth - "If you stick me down in the middle of Bangladesh or Peru you’ll find out how much this talent is going to produce in the wrong kind of soil"

And salary is taxed differently than dividends and capital gains. And salary is subject to FICA. And taxes top out at 35% at $340K - ish for salary.
Yes, there's corporate tax, but there's also corporate welfare, non taxable income, income from unrealized capital gains, etc etc.
(yes, my wife is making me look at our finances, yes it makes my head hurt)

I mean, you can dispute what should or shouldn't be calculated in the tax rate, but c'mon, the .001 rich folks with most of their money in the Caimans aren't taking the beating (proportionately) the rest of us are. Meanwhile their benefits are disproportionately high (in terms of social capital).

Oh, I'm not saying maybe (and I mean 'maybe' I have no clue at all) we need a bailout or we need regulation or whatever - so we hang on to jobs.
Maybe don't stick it to corporations and the rich so they employ more people - really, I don't know.

But I know enough to know my wife is savvy enough to pull off some stuff legally such that we're not getting put to the screws as hard as we might be.
And she's an Ivy league grad. I can't imagine too many folks earning a hand to mouth income have the time or the know how to really work the system - even if there was any incentive for the government to give them one (such as the "we employ people" thing for the wealthy).

Maybe (see above) this is the same thing. We need to bail these guys out or many many people lose jobs. Maybe it's the equivalent of the Works Progress Administration or the CCC in terms of prevention.

*shrug*

I'd think you wouldn't have to be an economist to understand this stuff.
I've been reading the stories, but it's so politicized and drama focused it's tough to get the facts and hash things out.
posted by Smedleyman at 9:45 PM on September 16, 2008 [1 favorite]



"It's fun to read other boards where this is seen as the government stealing AIG from the stockholders with very little in return. 80% stake in exchange for a loan at an awful interest rate."

An investment is a choice. Investing in the largest insurance company in times of intense economic instability was probably not the best option.
posted by clearly at 9:48 PM on September 16, 2008


It's fun to read other boards where this is seen as the government stealing AIG from the stockholders with very little in return. 80% stake in exchange for a loan at an awful interest rate.

That's my understanding too, the Fed gets an 80% stake in the company (which was only worth about $4-8 billion at today's market prices) for $0 plus the line of credit, which AIG will have to pay back at the LIBOR rate plus 8% or something crazy. It's like getting a credit card with a huge up-front annual fee. But I'm not exactly sure. It may be that the fed is buying shares when they make loans or something. I really don't know.
posted by delmoi at 9:49 PM on September 16, 2008 [1 favorite]


My mom lives in Houston, and works for AIG. She's close to retirement age, but her 401k just took a major dive. So she weathered the worst hurricane to hit in quite awhile -- not to mention the resultant water, power, and info loss -- to wake up to discover that her 401k is pretty much worthless, and that she very well may not have a job by the time they're able to repair the building she works in.

I don't know how to frame this, but I can't help thinking it at least tangentially relevant.
posted by treepour at 9:50 PM on September 16, 2008 [3 favorites]


Why would the contract (with who?) be written that way?

The buyers of debt write contracts that way precisely to discourage AIG from taking actions that would cause its credit rating to deteriorate. The intent of the contract is to force the shareholders into bankruptcy (or at minimum, lose a substantial portion of their investment). The idea is that if bankruptcy is the penalty, management will never allow the credit rating to deteriorate. Whoops.
posted by blue mustard at 9:53 PM on September 16, 2008 [1 favorite]


I'm not raging, because I know that I do not understand. I have a few questions though for those more knowledgeable than myself:

1. Realistically, if this loan is even enough to let AIG weather the storm, how much of a guarantee is there that the Fed will even call the loan due? This is probably just my paranoia over a corporate-controlled government speaking, but doesn't it seem possible or even likely that if/when AIG recovers, the Fed decides it's better for the markets if the loan is forgiven? Does the Fed's 80% stake entail any mechanism to prevent that from happening?

2. If this is all a domino effect from the Subprime Loans, which I've been led to believe it is, do the experts have an ultimate "price tag," so to speak, of what it would theoretically cost to stop the rest of the dominoes tomorrow? How much higher is that than it would've been 14 months ago?

3. What are the realistic best case/worst case scenarios on this once the dust settles?

Thanks!
posted by Navelgazer at 10:05 PM on September 16, 2008


Can't you guys just throw some of those rich Armani suit-wearing fuckers into jail? Or even better, put them up against the wall. I'll hand out the Che Guevara t-shirts.
posted by illiad at 10:06 PM on September 16, 2008 [3 favorites]


OK, first of all, I'm sorry if my questions are stupid.

Now, if I am reading this correctly, as of June, AIG had over a trillion dollars in assets. The margin call was $14.5 billion.

Would it not have been better to say "Hey, here's $50 billion in assets - a relatively trivial amount to us - who wants 'em, now for the cheap cheap price of $14.5 billion" than it would have to say "Let's give up 80% of our company"?

Obviously not necessarily all to one buyer. Is it basically impossible to sell enough to take in $14.5 billion in a week even if the stuff you're selling is clearly far more valuable?

Or has that "trillion dollars in assets" depreciated a hundredfold or whatever in the past few months?

Finally, if the margin call was $14.5 billion, why did the Fed have to loan them $85 billion - several times more than it would have taken to cover the call?

Again, I'm sorry if these are stupid questions.
posted by Flunkie at 10:06 PM on September 16, 2008


money rained from the sky for me and none of this scary shit happened

The 90s featured China coming online economically.

We tend to forget, but wealth isn't the numbers you see when you check your bank account online, but rather the stuff like the "plastic crap" they sell at Walmart -- toasters, pots & pans, a new screwdriver set.

Suddenly the world had a new supplier of wealth, and a willing buyer here in the US. Two trillion dollars of exchange later, we've got a lot of "plastic crap" here and the Chinese have got a lot of dollars. Since 1995, the total stock of money (M3) has risen from $4T to $14T.

I am no macroeconomist, but I think this credit growth was fueled by this injection by the Fed, as every dollar materialized onto the Fed's books becomes 10 or 100 dollars in the economy via the magic of fractional reserve lending.

Another, related injector was unrestrained deficit spending. The trade deficit meant our foreign partners had more dollars kicking around, which they sent back to us in the form of investments in government debt, mortgage debt, and consumer credit debt, commercial paper, etc etc.

The topper was Real Estate Sector appreciation. All this new money was looking for return, and real estate, being "the mother of all monopolies", has historically been the best place to park capital.

But in the present case, everything went awry when lending because disassociated from the 4C's -- character (FICO score), capacity (verified annual income), collateral (property value) and capital (savings). Lending became, at best, a one C (which the borrower was able to pick depending on his situation), leading to an unsupportable speculative boom in prices and the carnage we are seeing now that the thing has blown up and borrowers are exiting their financial agreements.
posted by troy at 10:07 PM on September 16, 2008 [6 favorites]


Socialism is the control of the factors and outputs of production by the working class instead of a capitalist class which purchases labour from the working class through the institution of wage labour, extracting "profit" by paying less than the value created by the work.

This has nothing whatsoever to do with socialism, and I'm sick and fucking tired of everything that isn't the 100% Ayn Rand Libertarian ideal of capitalism being "socialism". Words fucking mean things.
posted by Pope Guilty at 10:10 PM on September 16, 2008 [49 favorites]


Yes, there's corporate tax, but there's also corporate welfare, non taxable income, income from unrealized capital gains, etc etc.

Making matters interesting is that AIG moved offshore to avoid the punitive US corporate income tax system.
posted by troy at 10:10 PM on September 16, 2008 [1 favorite]


A lifetime of thanks to the first person to lay out exactly how this will affect the global financial market POSITIVELY in light of the possibility of AIG going bankrupt.

Really, i cannot grasp the hugeness of this idea. The BBC article, or more particularly the government of New York, David Paterson alludes to some hugeness that will be avoided by this drastic measure but does not really articulate just what sort of dread we're dodging... anyone care to elaborate?

to summarize: HOW IS THIS GOOD PLZ?
posted by phylum sinter at 10:13 PM on September 16, 2008


governOR* apologies (it is late)... this will matter tomorrow, though!
posted by phylum sinter at 10:15 PM on September 16, 2008


AIG had over a trillion dollars in assets

including dodgy assets:

Ten companies now have more Level 3 assets than capital. In order they are (as a % of total shareholder equity):

1) Bear Stearns (BSC): 313.97%
2) Morgan Stanley (MS): 234.88%
3) Merrill Lynch (MER): 225.4%
4) Goldman Sachs (GS): 191.56%
5) Lehman (LEH): 171.18%
6) Fannie Mae (FNM): 161.48%
7) Northwest Air (NWA): 142.02%
8) Citigroup (C): 125.06%
9) Prudential (PRU): 119.36%
10) Hartford (HIG): 108.52%

(source)

I can't find AIG, but I assume it's up there.

Finally, if the margin call was $14.5 billion, why did the Fed have to loan them $85 billion - several times more than it would have taken to cover the call?

It's not a loan, but a line of credit.
posted by troy at 10:17 PM on September 16, 2008 [2 favorites]


Would it not have been better to say "Hey, here's $50 billion in assets - a relatively trivial amount to us - who wants 'em, now for the cheap cheap price of $14.5 billion" than it would have to say "Let's give up 80% of our company"?

"80% of the company" means "80% of equity", not "80% of assets." $50b is not trivial to shareholders. Note that their equity (according to the presumably-out-of-date Google balance sheet) is $78b.


Finally, if the margin call was $14.5 billion, why did the Fed have to loan them $85 billion - several times more than it would have taken to cover the call?


Good question. I don't know. As others have suggested in this thread and elsewhere, it's possible that they expect to need additional liquidity to meet obligations arising from weather.
posted by blue mustard at 10:19 PM on September 16, 2008


This is frightening, to be sure.

So...Wal-Mart will buy T-bills to prop up the government's debt, then the Chinese call in the government's debt so China buys Wal-Mart, at which point China's economy collapses as well?

I'm a little more worried about how this will affect daily life- will the slowing of commercial paper make it difficult for, say, grocery stores to operate as we've become accustomed to?

Cue two presidential candidates desperately trying to learn all they can about economics.
posted by Monsters at 10:20 PM on September 16, 2008


Still, though, if they're not on that "level 3 assets" list, then they (apparently) have at most half of their assets in crap. That still leaves, at worst, half a trillion dollars of non-crap. Wouldn't selling ten percent of the non-crap at firesale prices be better than giving up 80% of your company?
posted by Flunkie at 10:22 PM on September 16, 2008


Wall Street's Total Market Cap Diagrams
Oct 2007 and now.
posted by troy at 10:25 PM on September 16, 2008


"80% of the company" means "80% of equity", not "80% of assets."
Ah, this makes a hell of a lot more sense now.

Thanks, everybody.
posted by Flunkie at 10:27 PM on September 16, 2008


As far as I can tell, none of the people responsible for these very poor corporate decisions will be walking away with less than a million dollars in their pockets. I would be more comfortable with the bailouts if the CEOs responsible had their heads lopped off and trading had to continue with the shouting and waving of white sheets of paper while standing in a pool of blood. You make the big money, you should take the big risk.

I'm not kidding. Skulls on sticks.

I'd like to have financial reform such that we could have televised executions, like you were right there when the SEC cuts off their heads and sticks them on a row of pikes along Wall Street as a warning to the next ten generations of bankers that some investments come with too high a risk. I would look up into their lifeless eyes and wave, like this: *wiggles fingers and makes a small, painful smile*
posted by adipocere at 10:28 PM on September 16, 2008 [24 favorites]


Privatize the profit, socialize the loss.

Beyond capitalism and socialism, this is more like economic fascism, the way failing corporations are intertwining with government to become an indistinguishable entity. You can't fire the board of a government, when your "vote" for either party results in the same damn corporatist policies.
posted by Blazecock Pileon at 10:29 PM on September 16, 2008 [15 favorites]


I remember the 80's when the Soviets fought wars in places like Afghanistan and did things like nationalize assets.

Now NATO is fighting in Afghanistan and the US is about to have a state-owned insurance company.
posted by Deep Dish at 10:32 PM on September 16, 2008 [3 favorites]


Wouldn't selling ten percent of the non-crap at firesale prices be better than giving up 80% of your company?

This is a LOC, not a loan, so there's a chance that AIG can pull through.

This article details what the board was trying to do, and why it rejected a private equity offer of cash infusion, for just the reason you question.
posted by troy at 10:36 PM on September 16, 2008


I'm not kidding. Skulls on sticks
China classifies 68 offenses as capital crimes. More than half are non-violent offenses such as tax evasion, smuggling, corruption and drug-related crimes.

Critics accuse China of using arbitrary standards to hand out death sentences and brutal methods to carry out executions. Beijing has used executions to crack down on white-collar crimes and executed batches of prisoners in public rallies scheduled on national holidays to maximize attention.[1]
posted by troy at 10:39 PM on September 16, 2008


Does anyone have any recommendations for a good "intro to macroeconomics" book? I find this interesting, and I (clearly) know little about it, so, assuming we don't go Mad Max in the next year or so, I'd be interested in learning something about it.
posted by Flunkie at 10:39 PM on September 16, 2008


"As of the most recent quarter, for example, A.I.G. had $20 billion of subprime mortgages marked at 69 cents on the dollar and $24 billion in Alt-A securities valued at 67 cents on the dollar.

But Lehman officials on a conference call with investors last week said it was valuing similar subprime mortgage securities to those held by A.I.G. at 34 cents on the dollar; its mark on the Alt-A holdings was 39 cents. Those valuations suggest almost a $14 billion decline in A.I.G.’s holdings, after taxes, an amount representing 18 percent of the company’s book value.

Additional write-downs may also be required in A.I.G.’s collateralized debt obligations, which the company does mark to market because they are held in a short-term account known as available for sale. The company valued $42 billion in high-grade holdings at 75 cents on the dollar, while it marked another $16 billion in lower-rated obligations at 70 cents."[1]

So $14B of mortgage debt to be marked down still, ~$60B in CDOs with God-knows true values. That's a couple years' worth of peak operating profit right there. Having to sell your most productive assets at this time of capital need . . . this is not good, maverick, not good.
posted by troy at 10:48 PM on September 16, 2008 [1 favorite]


Flunkie, I've found wikipedia to be a reasonably well-written resource.
posted by troy at 10:50 PM on September 16, 2008


I find this article's headline and content largely misleading in the respect that the Federal Reserve is not strictly speaking, a part of the US Government.

It has, however, assumed a large part of the financial tasks that (IMHO) should solely be that of a government and not of, in terms stated before here, a quasi-private or quasi-government body.

In the Fed's own words it is "independent within the government.", pure unadulterated double-speak. Independent within the government... hmmm... much like most other privately owned companies. ;)

In short to those up in arms about where their tax dollars are going... moot point! I believe a much bigger issue lies just beneath the surface here. But I will leave that to another thread.
posted by Don't_deceive_with_belief at 10:53 PM on September 16, 2008 [1 favorite]


To say that AIG, or any of these companies, were somehow compliant is utterly ridiculous.

They might have filled out the correct forms, but the fact is that all these companies have had billions of dollars of crap assets that have been grossly mispriced since they came on the books. Had these money managers made the slightest attempt to actually do the jobs that they are legally required to do, this never would have happened.

The excuse appears to be that "everyone was doing it". That means that everyone was engaged in financial malfeasance. Do you know, mortgage brokers are supposed to model their clients' income and can not give out mortgages unless they're almost positive that the client can make the payments - because mortgages that default are bad for both the brokers and the clients? Do you know that the people who securitize mortgages are supposed to due diligence on the underlying pools? Do you know that the money managers who purchase those securitized mortgages are also supposed to investigate the underlying pools, as well as scrutinize the securitization documents? And they damn well should - these people make huge quantities of money, they should do their jobs!
posted by lupus_yonderboy at 10:58 PM on September 16, 2008


Flunkie, there's also podcasts of UC Berkeley's Econ 100a and b (Macro & Micro) here.
posted by one_bean at 11:08 PM on September 16, 2008 [6 favorites]


Now NATO is fighting in Afghanistan and the US is about to have a state-owned insurance company.

And a really sweet sponsor's box at Old Trafford.
posted by Lazlo at 11:20 PM on September 16, 2008 [4 favorites]


Now John McCain can come out and condemn this action, and show that he's a maverick that disagrees with the administration.
posted by Crotalus at 11:31 PM on September 16, 2008


Now John McCain can come out and condemn this action, and show that he's a maverick that disagrees with the administration.
I think that John McCain should hire me as an economic advisor. I am clearly qualified. I have, several times, been close enough to Wall Street that I could see it. In fact, I have even been on Wall Street.
posted by Flunkie at 11:36 PM on September 16, 2008 [16 favorites]


My admittedly very limited understanding (dammit, jim, I'm a mathematician, not an economist!) admits the following tidbits.

First, all of these massive finance companies have shit tons of assets, but they tend to have an almost equal shit ton of liabilities to counter balance it. So while one might have $1T in assets, there may be, say, $972m in liabilities, leaving a margin of $28m to play with. If more than $28m is demanded, then everyone knows that they can't even pay their phone bills anymore and the company should be bankrupt. But on top of that, there's the issue of fungibility of their assets: Having 50 million sheep doesn't do you a lot of good when your creditors only accept cash or stiff drinks as payment. So you gots to sell your sheep before you can pay 'da man, and by the time you get that money together maybe twenty more of his friends have smelled that their investments are on the verge of going bad and want their money back, too. So suddenly you're stuck with a whole field of sheep, not nearly enough buyers, and a bunch of angry people wanting to fuck you over so that they don't, in turn, get fucked when everyone asks them where their money is, setting off a second wave of financial ruin.

The only upshot in this hypothetical model is that, in theory, we could just have everyone fucking the sheep instead of each other and everyone goes home happy. Except maybe the sheep.
posted by kaibutsu at 11:39 PM on September 16, 2008 [4 favorites]


And not a word about this printed at the supposedly libertarian Reason, dedicated to "Free Minds and Free Markets." Lots of anti-Obama and sympathetic Palin crap, though.
posted by raysmj at 11:50 PM on September 16, 2008 [3 favorites]


Those guys are libertarians up to a point. When challenged with their religious beliefs they go back to the one true faith.
posted by Blazecock Pileon at 12:04 AM on September 17, 2008


I don't think John McCain will come out against this when Phil Gramm, his finance campaign advisor, wrote the bill that kept any form of oversight away from credit-default swaps. His wife was working at Enron at the time, but I'm sure the ~$1 million she made had nothing to do with it.

Straight talk!
posted by benzenedream at 12:24 AM on September 17, 2008 [5 favorites]


And a really sweet sponsor's box at Old Trafford.

meh. I can't imagine Bush would want to go watch some lower mid-table side.... I suspect they will dodge relegation though.
posted by Deep Dish at 12:31 AM on September 17, 2008


your share of the nuclear arsenal your government owns

Same reason why you can't claim a share of Amtrak or the Post Office.


Exactly! Just the other day I was thinking, "Gosh, as a country we have large collective purchasing power. We pull together to pay for national defense, roads, trains, and postal service. What we should buy next? What do we really need?" And you know what I came up with? That's right -- an insurance company! An insurance company that compensates companies in the event that they make bad loans. This way, no lenders anywhere will ever lose money. That is a great idea.

To be really cool, we could take it one step further and have that insurance company also insure individual homes against disaster, or even pay firefighters to protect those homes. Hmm... firefighting, disaster response... if only we bought a health insurance company and an unemployment insurance company and merged them all together, we could call it "the social safety net."
posted by salvia at 12:45 AM on September 17, 2008 [6 favorites]


One of the largest problems the us financial markets are now in is that the markets are so intertwined and cross leveraged that the failure of one institution has the potential to pull the legs out from and destabilize another, either via asset value assignment or strict cross debt ownership. It would be "ok" and good for this to happen if we fully understood the downstream actions of the failures but we don't an that uncertainty is reflected in confidence in the markets. A rough analogy is remodeling your house, only your house was design by Escher. You may want to take down that wall to open the space up, but that wall may be the floor to an adjacent room, and the couch in that adjacent room may be holding up your roof.

You see some of the first with Lehman's assets being valued less than similar assets held within AIG, leading to AIG's need to source more short term capital. A rule of thumb with these assets is they have to be marked to market on the books and balance sheet, an asset is only worth what other people are willing to pay for it and with the market scared and worried that number continues to drop creating a need to maintain certain levels of cash or at least havie it readily available to pay investors if they call on you. In general it's in the best interest on the investors (the people/institutions who loaned you the money), to let you keep that cash to play with because when it was borrowed you promised to make it worth more, but when it looks like you're not going to do that and you may actually not even have the original amount given over, if it's possible to get some of the money back or extract some of the profits, you're going to.

The Fed's involvement in this deal as noted several times upthread is that they are willing to serve as a place where the company can turn to get loans (albeit expensive ones) to meet their other investors hopefully short term lack of confidence. It allows AIG and it's leadership (hah?) to go to private institutions and extract loans at a lower rate than the fed, with the confidence that even if they are turned away they have a guarantee vehicle for the funding anyway. It puts them in a better bargaining position to seek cash infusions on the private market and via the Fed's equity stake in the company it restores confidence in the market that the company isn't going to be loaned 10 billion and then crumple in 2 weeks as they continue to see the value of their assets erode.

The problems as I see them are that the markets need a couple of very large failures to correct and to be rebuilt, but those failures have to be both large enough to accurately correct and narrow enough to not take down other markets or players creating a cascading effect. Stability long term is the name of the game right now to allow for long term planning, regulatory reforms and instrument restructuring. Lack of stability freezes up the credit markets and panics investors.

Along with all the market stability actions going on within the last few weeks, the underlying theme as I see it is to protect institutions with significant direct consumer facing business. The fear of every day people running on the banks and the erosion of the consumer credit market even further from the opposite end, which would have paralyzing effects on the economy and flow upward creating much larger and more distributed instability with even more difficult to predict outcomes. This certainly isn't the only thing that could cause a wide spread erosion of the consumer side; energy, housing and food prices being others...but those others are unlikely to come home to roost in such an aggressive fashion as a run on the banks would, they are a known quantity in the eyes of the consumer. Their impacts are understood to some extend by people walking around on the street, and to that end the failure of AIG was likely large enough in my opinion to shake the confidence of the people in every day neighborhoods when coupled with the coming failures in retail banking. The Fed is hoping to knock a domino out of the way and stem the erosion of confidence.

Hopefully not too circular, but I can't sleep and I'm hoping to understand much of this better. This is my take on what's going on.
posted by iamabot at 1:19 AM on September 17, 2008 [2 favorites]


I neglected to add it on preview, but another contributor to the upstream problems as they relate to LB and ML and AIG are the ratings agencies. Those agencies rated securities and businesses without fully understanding their impacts to the system, they are correcting those ratings now and is desperately needed, but those shortfalls in the accuracy of their ability to rate is certainly a large contributor in the problems with stability, and I don't think that a correction within the ratings agency is going to be anywhere near enough to adjust the market sufficiently.
posted by iamabot at 1:23 AM on September 17, 2008 [1 favorite]


Flunkie, Mutant's profile has some good resources. I'm slowly working my way through one of the textbooks I found using something that rhymes with "borrent".
posted by afu at 3:12 AM on September 17, 2008


talk about eating your own dog food!

as investors shouldn't we have waited until the incompetents were hauling their personal effects from their desks (that they brought in to make them feel more secure for working in cubicles) to snatch up whatever loans for pennies?

i call shenanigans.
posted by edmo at 4:05 AM on September 17, 2008


Most cons need a victim that is greedy and this whole mess was a classic bait and switch. The subprime one was a good one as it conned the people getting mortgages (baiting them with greed that their purchases could only go up) and then turned around and switched the ratings so the greedy investors buying these mortgages also were suckered. Time for some legal fraud prosecutions, not the time to help them get out of town.
posted by Bitter soylent at 4:23 AM on September 17, 2008


Short answer: Instead of letting failed business models fail, the government is now SPONSORING those business models. Now that they've started, there's no way for them to stop. This will eventually result in near-complete economic destruction.

Long version:

Ok, big picture time. The global financial system doesn't work. It just doesn't. It runs on debt, and the amount of debt that's required to be issued every year to keep it running is now beyond the ability of the economy to service.

What needs to happen is a massive crash. This is really the only option. We're going to end up there anyway. Much of the debt in the world is bad, including a very large chunk of the real estate debt, which has been in a bubble for the last several years. Our economy is sick because there are too many dollars and dollar-like things in the world. All modern money is debt, and between the money itself and the various abstractions of money (derivatives, etc) floating around, the economy can't service it. Another way of looking at derivatives is risk; there's too much risk in the system, and too much risk is required every year, more than the economy can safely provide.

What the Fed is doing with this bailout is turning a large amount of super-size fake money, derivatives, into ordinary fake money, dollars. This is a bit indirect, because they're propping up the insurer who backs many bad derivatives, but as AIG pays out, that's the net effect: dollars transfer from Fed to AIG, claims on bad derivatives are filed, AIG transfers cash to holder of bad derivative. Voila, bad debt monetized. The Fed will probably need to funnel a lot more than a piddly $80 billion into AIG.

This is profoundly inflationary. We've been suffering from enormous inflation over the last ten years, it's just been in things that we LIKE -- stocks and real estate, mostly. It's just as damaging as every other kind of inflation, but we cheered it and wanted more. What's been driving those prices is debt. The Fed monetizing the bad debt means that more debt is going to be issued, because that's what the modern financial system does -- magnifies dollars into enormous debt through leverage. The economy can't support any more, so the net result is inflation. This is much of why the oil price has gone crazy, because the speculators of the world have too much money. They get in, the price skyrockets, they get out, the price plummets. They have far too much power. The Fed is continuing the transformation of the American economy from a wealth-producing machine into a casino. It's putting the speculators in charge, and you're the one footing the bill.

Basically, there are two possible outcomes in endgame. The best one is a crash, the Second Great Depression, in which the financial system realizes that a very large percentage of the debt in the world is bad, and many of the biggest players evaporate. Credit dries up, and the economy returns to running mostly on cash for some time. Millions of people will die if this happens. The second one is where the United States turns into Zimbabwe, with the dollar turning into the peso. Massive inflation will eat your standard of living, and eat it, and eat it, and eat it. That's what the Fed is actually trying for. They're keeping Wall Street fat and happy at your expense; your standard of living will be destroyed to keep the system operational.

They're not, I don't think, consciously trying to do that. Rather, at every step, the immediate pain of contining bailouts will seem worse than the costs of letting it fail, so the bailouts will continue, regardless of the ultimate consequences. And, I imagine, the US Government will become the economy, because that appears to be the path they're taking. They'll have to use the power of the printing press to keep these failed businesses 'solvent', along with paying all their other obligations. This will prevent new, better economic models from arising in their place, because the power of money-printing trumps everything else. Eventually, the economy will disintegrate from hyperinflation, even more thoroughly than it would have from a depression. Instead of millions dying, it will be hundreds of millions or even billions. Hyperinflations are profoundly destructive; they are far worse than any other outcome. In depressions, the core of the economy survives; in hyperinflation, EVERYTHING is ruined. All that's left is a smoking crater.

There's an extremely low-probability third option. If we can totter along the middle ground long enough, which will get narrower and narrower with each passing month, we might figure out fusion power in time. If that works, and has a high rate of return on investment, it will change everything. But hoping for that to bail us out isn't much different than hoping for the Tooth Fairy. Choosing hyperinflation, hoping for some magic effect to come and save us all, is irresponsible as hell.

So why is my outlook so dire? Why do I see only doom and gloom? Because the only good solution to a bubble is not to have one. We had our first one in 1996-2000. We should have crashed from that, had a horrible decade, and then resumed growth. Instead, the Fed printed money like crazy, more of what made us sick in the first place, and set off two new, far larger bubbles, debt and real estate. Instead of being responsible stewards of the economy, they got behind the bubbles and literally cheerled them. Greenspan was advising people in 1995 to go get ARMs, fer chrissake. And now we have to eat the fallout from all three bubbles, and the Fed is doing its damndest to set off new ones to keep the global debt machine running.

If Alan Greenspan had personally visited the house of each and every one of you, had carefully piled half of everything you own on the lawn, and had then taken a flamethrower to the pile, he would have done less damage to you than he did as the Fed chairman. Bernanke, it would appear, is burning the other half, and he's not putting it in a nice pile outside. He's torching it in place, taking your house with it.

And you're privileged. You lose stuff. The Third World will be losing their lives.
posted by Malor at 4:27 AM on September 17, 2008 [12 favorites]


Malor, do you have a fricking script that you just wait to copy and paste into any sort of financial thread? Are you even remotely knowledgable to comment on the actual matters at hand, instead of co-opting the entire discussion to meet your selfish need to once again put out a Nostradomus-like doomsday story every time someone has the audacity to talk about the financial economy?

I mean, why don't you just write in all-caps "ZIMBABWE, ZIMBABWE, ZIMBABWE!!!!!!!!!" It would be just as effective, and just as informative.

My thoughts on AIG are here.
posted by SeizeTheDay at 4:45 AM on September 17, 2008 [5 favorites]


So to summarize, Malor, the apocalypse is here, unless we discover nuclear fusion. Mmkay. You're on to something though, which is that economic growth is indeed powered by technological innovation and productivity gains. But while abundant cheap power would indeed be wonderful for the economy, it would not fundamentally change economics or permanently eliminate the possibility of inflation or hyperinflation. We'd see rapid economic expansion for a while, and then reach some limit.

I don't really understand the rest of the post, however, despite reading it multiple times. Dollars and derivatives are not "fake money" (if you really think so, feel free to send me all your fake money). And while there are indeed scenarios that could lead to stagflation, or even hyperinflation, I don't really understand the one you're describing.
posted by blue mustard at 4:53 AM on September 17, 2008 [1 favorite]


And you're privileged. You lose stuff. The Third World will be losing their lives.

Actually if there is world wide economic collapse, subsistence cultures will be the least affected.
posted by Bitter soylent at 5:00 AM on September 17, 2008 [1 favorite]


There seems to be a lot of confusion on the Yahoo message boards for AIG as to what the value of AIG is now that the US Gov has a 80% ownership. Did the Gov get 80% for $85 billion or did they get 80% for the interest on an $85 billion loan? Will the US divest at the end of the loan period (2 years I believe)?
posted by PenDevil at 5:01 AM on September 17, 2008


Flunkie -- "Does anyone have any recommendations for a good "intro to macroeconomics" book? I find this interesting, and I (clearly) know little about it, so, assuming we don't go Mad Max in the next year or so, I'd be interested in learning something about it."

Flunkie, as afu mentioned I maintain a list of resources (web sites, books, newspapers, journals, etc as well as a study plan in my profile that might help.

But in term of books, here in thread I'' recommend a few different tittles that you might find helpful, depending upon your background and specific interests. I teach finance part time at two Universities in London, and will suggest books that have been received well, having been pushed past a variety of students.

That being said, I'd suggest a visit to a library or bookstore for a review before plopping down some cash for the books that I'll describe here. Disclaimer: I'm more a Capital Markets person professionally and by education (Quantitative Finance, with a specialty in Econometrics), and this might show in my recommendation of books. Someone else who is more of an "pure" Economist than I (and I mean that most respectfully) may chime in later with some tomes that are better targeted for your interests.


Before we get into University related stuff at few more pop oriented books.
n
  1. First, I can't recommend Economics for Dummies enough. These are fantastic books to pique one's interest or provide a basic level of understanding ( authors: Antonioni and Flynn).
  2. Second, The Pocket MBA is a good intro read as well, hitting many broad (and timely!) topics not only about economics but also management. This is important as it put things like currency cross rates / demand elasticity into context, which facilitates understanding.
Next up, broad references to help when reading newspaper articles or books. I've got some to list here, not only to recommend but also that I own and use:
  1. Capela's and Hartman's Dictionary of International Business Terms.
  2. Also very useful is Downes' and Goodman's Dictionary of Finance and Investment Terms ; these two books compliment each other very well.
  3. I'd suggest grabbing a copy of The Economist Guide to Global Economic Indicators. You take that book to a party and you'll settle a lot of arguments - ha! Actually, this is a very, very accessible reference that keep at my desk. Very nice piece of work.
  4. Rosenberg's Dictionary of International Trade is very well done, rather useful especially if you start reading the financial news (FT please as The Wall Street Journal is far too US centric for my tastes) or Economist regularly.
Ok, Uni stuff. I'll only list a few here and if you're interested drop me a mail and we can discuss other options further.
  • We've gotten good results in our MBA and MA International Finance tracks with Business Economics: Strategy and Applications by Cook & Farquharson. This book effectively illustrates macro concepts in a business framework, and thus helps students understand rather abstract economic concepts as their application is obvious. We get three different classes out of this book (perhaps 50% of the text at the intro level, remainder supplements other texts covering more advanced material).
  • If once you start to push through the material you think you may need some remedial math, Statistics for Business and Economics by Newbold, Carlson and Thorne is recommended. This will provide a rather gentle introduction to the topic, yet provide enough "headroom" so if you find this embryonic interest is ignited (yeh, that happens a lot so don't be surprised!!) you'll have the appropriate text. We use this in the previously mentioned MBA / MA tracks, mostly at the intro level.
  • The final recommendation is Thompson's International Economics: Global Markets and International Competition. This is one of three "core" texts for our Global Economics class, and will get you a really good overview of macro from global perspective (which is just about the only perspective that matters these days, but that's for another thread ... ). At times he does a superb job of providing examples linking theory to "the real world", and unlike many other books I've seen doesn't spare the graphs or illustrations. Another book with lots to give, nice job overall.

This is all fine from an academic point of view. If you'd really like to understand how this stuff works - qualifier: as much as any of us can these days, the field is just too damn large and sprawling and, as iamabot touched upon very well, interconnected these days) - you're going to have to start to read regularly.

By that I mean finance and economics publications and web sites, reviewing market data, understanding the dynamics that's impacting not only the specific market you're interested but also global impact. Because it's all connected these days.

But avoid blogs, at least early on in your self education. Almost all of the misconceptions and misinformation we see time and time again in the Finance and Economics threads is down to folks reading a few blog postings, and accepting at face value viewpoints that most working or educated in the field consider "extreme". And it understandable why - you need a solid foundation to critically read other's opinions and books, augmented by watching the markets is the best starting point.

Hope this helps! Don't be afraid to MeFiMail if I can be of further assistance.
posted by Mutant at 5:10 AM on September 17, 2008 [66 favorites]


Former Allstate CEO Edward Liddy will be the new CEO of AIG, which was rescued by an $85 billion loan from the Fed, in exchange for an 79.9% stake in itself.

Liddy profile
posted by netbros at 5:51 AM on September 17, 2008 [3 favorites]


Almost all of the misconceptions and misinformation we see time and time again in the Finance and Economics threads is down to folks reading a few blog postings, and accepting at face value viewpoints that most working or educated in the field consider "extreme".

Yeah, well, most working in the field, making famous profits doing so, I might add, have gotten their macro predictions entirely wrong. Companies that are absolutely central to the economy are failing on all sides. We oh-so-ignorant outsiders were right about the bubbles, we were right about the ensuing blowups, and we're right about what these bailouts really mean.

The derivative models that Wall Street and the econometricians use don't work, and only massive intervention by the Fed and Congress is keeping them viable, even temporarily. The cost is simple: your existing standard of living.

Well, not YOURS. YOUR standard of living, because you manipulate wealth for a living, will be just fine; you'll be able to keep buying your Rolexes every year. But the ordinary people, the ones actually creating wealth, are being ruined.
posted by Malor at 5:53 AM on September 17, 2008 [5 favorites]


PenDevil -- "There seems to be a lot of confusion on the Yahoo message boards for AIG as to what the value of AIG is now that the US Gov has a 80% ownership. Did the Gov get 80% for $85 billion or did they get 80% for the interest on an $85 billion loan? Will the US divest at the end of the loan period (2 years I believe)?"


Yeh, they've given AIG an loan and taken ownership of 80% of the firm as collateral. At the same time the loan was contingent upon The Feds putting their own management team into place, which they've done.

I'd be careful about AIG as anything but a lottery ticket; who knows what that remaining 20% will be worth.

Market chatter indicates they're moving for a fast break up; I wouldn't be surprised to see them start to parcel it out in the next couple of weeks if not sooner, but that's my own personal opinion, solely based upon talking to folks who are active in that part of the market. Lots of deal planning going on now, and AIG's got lots of very, very attractive assets - and some not so attractive but in these times you do not have to take your bitter with your sweet, this being a buyers market and all, don't you know.

Of course many folks (starting with those owning that 20% slice of the pie) will want to keep AIG intact, so we'll see who wins. I hear the regulators are pushing for a break up, and internally The Feds want (probably have to) to do something with it fast, so I suspect the loan will be paid down, and markedly, before maturity.

By the way, most of AIG's problems, as well as the current market turmoil (all markets by the way, not just the equity) has it's origins in FASB 157, which I first wrote about on Metafilter last January. I've since come across a fairly decent PowerPoint here, if this helps anyone understand what's going on.

Its an interesting accounting standard - one that builds upon FASB 133 Accounting for Derivative Instruments and Hedging Activities - but perhaps one that very few realised just how traumatic it's adoption would be. Oh well, at least someone is starting to crack down. The Accountants, it would seem - I'm not really sure what the regulators have been up to at times. I've previously posted regarding my dealings with regulators, in that it seemed only BOE were sharp and fully on the ball.

Incidentally folks, and looking at this more from the equity market point of view - on Tuesday September 30th we're coming up on a simultaneous month end and quarter end. This is when Investment Banks will square their books for more detailed regulatory reporting covering, September 2008 (month end) and Q3 2008 (quarter end), so I expect lots more volatility to come.

But before that we've got to get through Friday's triple witching unscathed. Now that will be a fun session.

If you folks are long - all the best!!
posted by Mutant at 5:59 AM on September 17, 2008 [2 favorites]


Lost in all of the hyperbole is the central role the morons at rating agencies have played not only in the runup to the crisis, but in the precipitation of the most recent events.

BTW, the government did not BUY AIG. It basically bought a warrant (A right to buy at a set price for a period of time) to allow time for AIG to sell its HUGELY profitable businesses to cover capital reserves required to avoid a downgrade by ratings agencies. The government MAY own AIG if certain conditions are not met - like being able to sell its businesses.
posted by sfts2 at 6:04 AM on September 17, 2008


I just realized. When McCain said he wasn't "well versed" on the economy, it was after he had already been the chairman of the Senate Commerce Committee.

Three times.

And because the fundamentals are so strong, he is now actively taking credit for the economy.

Throw in some AIG/Lehman/Bear Stearns logos, Wall Street footage and dramatic music, and wouldn't this make a great ad?
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 6:10 AM on September 17, 2008 [4 favorites]


Hank Greenberg, who largely built AIG (and who claimed in a TV interview Tuesday that AIG was a "national treasure") Greenberg served as Chairman of the CFR's Task Force on Terrorist Financing? (See acknowledgements, p. 6).
http://www.cfr.org/content/publications/attachments/Terrorist_Financing_TF.pdf

(Insert snark about Bin Laden wanting to destroy US economy here.)
posted by rough ashlar at 6:13 AM on September 17, 2008


Have y'all seen the clip on Youtube of Investment Banking on Salvia ?

Looks like it may have been taken down.
posted by Xoebe at 6:30 AM on September 17, 2008 [1 favorite]


East Manitoba the Senate Commerce Committee doesn't deal with banks and Wall Street Stuff. McCain doesn't know what his own committee does.

So like everything else he was giving us the Straight Talk(tm) back then and is now just making shit up.
posted by birdherder at 6:37 AM on September 17, 2008 [1 favorite]


This is another instance where the US nationalizes unprofitable but important industries (or ones that it wants to directly manage during wartime) while other countries nationalize their profitable or popular industries. Except we call their version "socialism". Insert your favorite cliche here about privatizing profit and nationalizing risk.

Chrysler's failure would have likely sparked innovation and a better version of Detroit; now, more bailouts will continue giving the false (?) signal of security to oligopolists and maintain some more wretched fundamentals in the economy. Here's hoping that the next administration starts enforcing the antitrust laws to prevent companies aggregating assets to the extent that their failure would destroy the economy.

I still think they should have been allowed to fail, and the government intervened only to assist the innocents. This way we all suffer, and for longer, while those that caused the catastrophe keep sipping their Cristal. They should be in jail.
posted by norm at 6:40 AM on September 17, 2008


Chrysler would be a contender now, if the U.S. gov't had taken the lead on running a company that it had bailed out -- better CAFE standards, alternative fuels, etc.

But wait, that was under Reagan! It couldn't have been communist then, could it?
posted by vhsiv at 6:47 AM on September 17, 2008


Ah got a couple of MefiMails asking about other books, so here's a couple more recs.

For a very accessible text on essential finance mathematics, see Kitter's Investment Mathematics for Finance and Treasury Professionals: A Practical Approach.

Very nice book, clear examples and minimal jargon. Sidenote: I worked with Kitter back at Dow Jones in the early 80's (wow don't I feel old!!) and he was an excellent gentleman, always willing to talk finance and the markets, always positive and willing to share knowledge. While I had a life long interest in the markets he's one of the guys that really sparked it for me.

On the subject of Value at Risk (VAR) models, Best's Implementing Value at Risk is another book I value (was nice pun yes??) very highly. Hands on, practical, I like his treatment of data - very insightful, as most of the problems we have in this business are data related. I've met Best as well at a couple of academic seminars, and, like many people in finance, he's open and approachable and eager to share his knowledge.

I don't really recommend trading strategy books - as this is something very personal that you've just gotta figure out as you read books / journals / newspapers / etc and watch the markets to build your knowledge and expertise of finance - but one that I've read several times now is Spare's Relative Dividend Yield: Common Stock Investing For Income & Appreciation. He's got some good points, and its worth taking a look see at B&N, and maybe even buying it.



stfs2 ---"Lost in all of the hyperbole is the central role the morons at rating agencies have played not only in the runup to the crisis, but in the precipitation of the most recent events."

Yeh, great point that I feel qualified to comment on, having worked for one of the ratings agencies (I think I left before becoming a moron, but Mrs Mutant would disagree) in their Professional Services division; effectively building Credit, Market and Operational Risk models for Tier 1 investment banks.

They had a clear case of moral hazard. Let's look at the business a little closer.

The Ratings Agencies serve a very important role in the financial ecosystem, providing what should be objective ratings on everything from Sovereign (e.g., The United States, Russia, etc) to specific tranches of structured products (e.g., CDOs, etc).

Its an incredibly lucrative business, as once the models are built they've just got to be recalibrated to suit changing markets and obligors. Maybe 10% to 40% of the overall effort is calibration, a lot more work goes into identifying discriminatory factors, for example.

But sometimes ratings work was pulled if, for example, if the rated entity didn't like the rating assigned to one of its offerings. So, not good the ratings agencies caved. I do believe there is litigation open so I'm not going to add more details but that's a broad summary of what you can read on google news.

I'm explaining, not excusing what happened by the way.

So I think at least three of the ratings agencies will be feeling some pain, and its a clear market opp for another firm to waltz in and start to build market share, very, very fast (perhaps a firm of Oliver Wyman's calibre, for example).


rough ashlar -- "Hank Greenberg, who largely built AIG (and who claimed in a TV interview Tuesday that AIG was a "national treasure") "

Run the other way when they start to make that argument. I've been in banking since the early 80's and watching the markets all my life - anytime that old horse has been trotted out to justify what should be purely a business decision the stock is a clear short. Headed to the bottom, titanic style.

He's reportedly been trying to raise money but no go. So now he's getting all emotional. What a surprise - when logic and reason fails the sleazy types try emotion. Always. Watch out for personal insults next. Not sure who he'll aim at (Paulson? Bernanke?) but personal insults always follow emotion. Always.

Part of the bubble collapse consulting work I've picked up has to do with looking past the immediately inflicted into their counterparties, mostly hedge funds. We're trying to get ahead of the curve, and understand today what tomorrow might bring.

To use a technical word - there was some funky ass shit going on, cross holdings / dealings / CDS' on top of Structured Products consisting of CDS' (synthetic CDOs by definition), on and on. Wow I thought I'd seen a lot until I started looking at some of these holdings.

Gosh I'm not in a position to cast final judgement, but I say break AIG up. Far too big, far too complex, far too interraveled.

I'm just a dumb country boy, don't like complicated much if I can avoid it.
posted by Mutant at 6:49 AM on September 17, 2008 [6 favorites]


As usual, Dealbreaker has an interesting viewpoint:

We're told that this was necessary because the failure of AIG posed a systemic threat to the financial system. This gives rise to a riddle, however. If the financial system was threatened, why wouldn't the financial firms who were presumably staring into the abyss agree to build the bridge loan? Surely they would have had the most to lose from the collapse of AIG.
posted by blue mustard at 6:58 AM on September 17, 2008


Is AIG insuring FDIC?
posted by watercressprincess at 7:01 AM on September 17, 2008


I love this country... privatize gains for the elites, socialize risk to the poor... whoever came up this plan is a genius! The New World should hire this guy as its leader to maintain its Order...
posted by watercressprincess at 7:03 AM on September 17, 2008


WSJ has an interesting article on one of the component parts, that really wants to be spun off because the mothership is dragging it down. (And as a bonus you can also learn something about the guy that Air and Space Museum extension is named after.)
posted by smackfu at 7:08 AM on September 17, 2008 [1 favorite]


Network 1976: I am mad as hell...and I am not going to take this anymore.
posted by watercressprincess at 7:10 AM on September 17, 2008



blue mustard -- "We're told that this was necessary because the failure of AIG posed a systemic threat to the financial system. This gives rise to a riddle, however. If the financial system was threatened, why wouldn't the financial firms who were presumably staring into the abyss agree to build the bridge loan? Surely they would have had the most to lose from the collapse of AIG."

Thats an interesting link - many thanks for posting.

I'd suggest their answer (bridge loan) is correct for Lehman or perhaps a smaller Investment Bank, but let's revisit a point I made before, explaining why folks were content to let Lehman go under.

After all of Lehman's competitors were shown the family jewels, and after looking very, very carefully over the assets and liabilities and, using their own inside knowledge of their own portfolios and capital on hand, the heads of the other banks knew one thing very well - that they would make more money picking over Lehman's carcass then they would bringing the fat pig home for butchering.

AIGs another order of magnitude larger and more complex than Lehman. Maybe two orders. Very nasty portfolio, fingers in everything. I don't think we really knew just how large and sprawling their business really way. They had clearly lost control of it, otherwise we wouldn't be having this pleasant chat.

So I say backstop it, start to close it down and sell it off. All the benefits of a collapse but without some of the nasty blow back.

As long as they move quickly ... market chatter says Buffett is gonna make a bid by COB today. We'll see if it wants it all or just the pretty parts.
posted by Mutant at 7:11 AM on September 17, 2008 [2 favorites]


Never will our city be destroyed by Zeus' decree,
Nor by the will of the bless'd immortal gods,
For, born of a potent father, great-hearted guardian
Pallas Athena spreads her hands o'er our city
But, by money seduced, the Athenians themselves
Seek mindlessly to corrupt the great city,
Joined by the iniquitous schemes of their leaders,
Who from arrogance great woes shall suffer:
For they understand not how to restrain gluttony,
Nor best to order their feasting in quiet.

Sparing neither sacred ground nor public goods,
Greedily they steal from the one place or the other.
They fail to protect the rev'rend temples of Justice,
She who notes silently what is and what has been,
Who in time shall come exacting retribution.
Behold, an inex'rable harm visits all Athens:
To vile slavery is she swiftly progressed,
Which rouses up from slumber civil strife and war
War that wipes out for many their cherished youth;
Now our much-loved city is soon worn down by faction,
While the wicked stir them to confrontations.
These evils ensnare the whole people; but the poor,
Many of them, depart to a foreign land,
Plundered, and bound up in shameful fetters.
For the slave's yoke bears all other wickedness.
Thus does the public evil come home to each of us:
Straining, the courtyard gates no longer hold fast,
The evil leaps o'er the high walls; it finds everyone,
Even him fleeing to the inmost chamber.

This my soul commands me teach the Athenians:
A bad constitution brings civic turmoil,
But a good one shows well-ordering and coherence,
As it puts shackles 'round about wrong-doing
It smooths out the rough; it checks greed, tempers hubris,
And withers the fruits of reckless impulse.
It takes crooked judgments and makes them straight,
Softens arrogant deeds, halts seditious acts,
And ends the bile of grievous strife. And so under it,
Everything for mankind becomes whole and wise.
posted by Ritchie at 7:15 AM on September 17, 2008 [3 favorites]


You do understand, don't you, that AIG is not a person? Deserve's got nothing to do with it.

Actually, AIG, being a corporation, is treated in many regards as a person under the law.
posted by lordrunningclam at 7:22 AM on September 17, 2008 [1 favorite]


So the market is shitting it because they might lose their insurer and be forced to actually face their risks for once? Doesn't sound utterly awful.
posted by bonaldi at 7:34 AM on September 17, 2008


All the benefits of a collapse but without some of the nasty blow back.
This is interesting, actually. Although it's not all the benefits -- hecklers lose the schadenfreude.
posted by bonaldi at 7:35 AM on September 17, 2008 [1 favorite]


Privatize the profit, socialize the loss.

All of this could be solved if there were a set of BIGGER companies who provided insurance against to THESE companies for this sort of thing. AMIRITE?
posted by fusinski at 7:44 AM on September 17, 2008


What are we supposed to be getting for 85 billion?

A worthless company?
The best thing we could have done with 85 billion to avert a financial meltdown?
Or a postponement of doomsday until the next administration?

It seems like our financial strategy lately is: everyone jump out of the lifeboat to rescue the drowners. Meanwhile, the lifeboat floats away.
posted by dances_with_sneetches at 7:46 AM on September 17, 2008


So let's see...
Bear Stearns ... bailout
Lehman ... no bailout
AIG ... bailout

Is there a pattern forming? Just Exactly Why do some get it and some not.
posted by hexatron at 7:57 AM on September 17, 2008


The US government sucks at capitalism AND communism.
posted by chunking express at 7:58 AM on September 17, 2008 [4 favorites]


What are we supposed to be getting for 85 billion?

For our LOAN, we get 80% of the company.
posted by smackfu at 7:59 AM on September 17, 2008


And not a word about this printed at the supposedly libertarian Reason, dedicated to "Free Minds and Free Markets." Lots of anti-Obama and sympathetic Palin crap, though.

Odd; when I just checked, at the top of Reason's front page was Palin's Pot Problem, and near the top of their blog was Bailouts Are Back!
posted by roystgnr at 8:05 AM on September 17, 2008


Here's what Sen. Charles Schumer had to say on this.

"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.
posted by a3matrix at 8:07 AM on September 17, 2008


Thank God the GOP was unable to privatize Social Security.
posted by ornate insect at 8:15 AM on September 17, 2008


state capitalism! (it took nixon to go to china ;)

too big 'important' to fail be taken over by the private sector...

so whenever gazprom becomes an instrument of the state, or venezuela gets into cement, or any number of sovereign wealth funds seek equity stakes, the US is now hardly one to talk, altho it will because it's 'different', but the point tho is that now it's not that different any more...

you have a gov't run mortgage market (if not yet all of housing – which can still come) and now insurance, i.e. is finance the US' 'commodity' (protected national resource)?
  1. with the transformation of the fed's B/S
  2. suspension of rules on using depositors' funds for investment banking
  3. treasury (and the nyfed) pushing the boundaries of congressional authority
maybe it's just an acknowledgement of what was always the case, but if so it's a stunning repudiation of the myth (or free market ideology)...
posted by kliuless at 8:19 AM on September 17, 2008


Is there a pattern forming? Just Exactly Why do some get it and some not.

I read somewhere that 30 Congresspeople had ownership in the bailoutees. Not so much for Lehman.
posted by troy at 8:24 AM on September 17, 2008


I call market bottom when Ben Bernanke wants my teeth for the Federal Reserve.
posted by mazola at 8:25 AM on September 17, 2008 [2 favorites]


When will WaMu crap out?
http://www.nypost.com/seven/09172008/business/feds_try_to_find_a_buyer_for_wamu_129499.htm
posted by watercressprincess at 8:26 AM on September 17, 2008


Do others agree with Malor here?
What the Fed is doing with this bailout is turning a large amount of super-size fake money, derivatives, into ordinary fake money, dollars. This is a bit indirect, because they're propping up the insurer who backs many bad derivatives, but as AIG pays out, that's the net effect: dollars transfer from Fed to AIG, claims on bad derivatives are filed, AIG transfers cash to holder of bad derivative. Voila, bad debt monetized. The Fed will probably need to funnel a lot more than a piddly $80 billion into AIG.
It kind of sounds that way, eg, in the WSJ:
That the government would prop up AIG financially offers a stark indication of the breadth of the insurer's role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world....

AIG was a major seller of "credit-default swaps," essentially insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses.
Does that last sentence mean that the US government has now agreed to reimburse policy holders' mortgage losses up to at least $85 billion?
posted by salvia at 8:29 AM on September 17, 2008


FWIW a while ago I read a book called "The Lost City" by John Gunther. It was about a journalist (obviously a fictionalized version of Gunther himself) in 1930s Vienna.

It was all about the final creaking collapse of the Habsburg empire--the massive, failing banks, the attempts to prop up the financial system, the network of Very Rich Old Guys working and finally failing to keep the banks "too big to fail" from doing just that, the currency devaluations, attempts to hide all this from the press, and use of intimidation and bribery to keep the truth of the situation out of the media, and pleasant stories about the underlying strength of the economy in.

The end of all this, of course, was a minor revolution and then the Anschluss that united Austria with Germany and set the stage for WWII.

It's hard to avoid the comparisons between that situation and the one in the U.S. today--not so much in the details of it, but just in the feeling (as an average citizen) that really huge financial institutions are failing, it's all far beyond our personal control, it's easy enough to look back and see a lot of the root causes of the situation but not so easy for anyone to figure out how to deal with the situation now that we are in the middle of it, and we do seem to be in the middle of it, or even towards the beginning, with potentially much worse failures looming on the horizon.
posted by flug at 8:42 AM on September 17, 2008 [6 favorites]


I hope I can save 15% on my car insurance with these guys now that I'm a shareholder.
posted by Lord_Pall at 8:59 AM on September 17, 2008 [2 favorites]


From smackfu

"What are we supposed to be getting for 85 billion?
For our LOAN, we get 80% of the company."

If 80% of the company was worth 85 billion, there would have been a lot of companies interested in this "investment." The fact that no one was interested says we are left holding the bag.
posted by dances_with_sneetches at 9:07 AM on September 17, 2008


Hank Greenberg, who largely built AIG (and who claimed in a TV interview Tuesday that AIG was a "national treasure")

That was on Charlie Rose, yes? Some years ago I had a gig with AIG, ended up having lunch with Hank in the company cafeteria. Nice guy.
posted by scalefree at 9:20 AM on September 17, 2008


the network of Very Rich Old Guys working and finally failing to keep the banks "too big to fail" from doing just that

With the traditional percentage of people of Jewish persuasion in banking, I wonder how much that effort became intensely personal. Keep the wheels on or get Anschlussed, all your assets seized, and you and your family thrown into Dachau.
posted by troy at 9:43 AM on September 17, 2008


For our LOAN, we get 80% of the company.

80% of a company that's both actually and technically insolvent? Which has almost no tangible assets of any type? That's deeply underwater in its intangible assets? A company that's squandered its "goodwill" asset and whose only unrealized asset is its personnel - during a time when trained Wall Street people are a drug on the market?

As a taxpayer, I also don't see the value here. We all know there aren't going to be enough chairs for everyone when the music stops, the sooner we find out the extent of the damage and get to fix it up, the better. Either the Fed should just seize the damn firm and unwind it, or it should be allowed to fail on its own. Keeping it on limping, hemorrhaging more capital from the Treasury to no purpose, is an abomination.
posted by lupus_yonderboy at 9:58 AM on September 17, 2008 [1 favorite]


So much of this feels like the S&L crisis, I'm wondering if there is going to be a RTC-esque scandal to follow. Completely bizarre that a part of the Keating Five would be running for the presidency.

The more things change man...
posted by quintessencesluglord at 10:10 AM on September 17, 2008 [1 favorite]


Completely bizarre predictable that a part of the Keating Five would be running for the presidency.

FTFY.
posted by ornate insect at 10:25 AM on September 17, 2008 [1 favorite]


As a taxpayer, I also don't see the value here. We all know there aren't going to be enough chairs for everyone when the music stops, the sooner we find out the extent of the damage and get to fix it up, the better. Either the Fed should just seize the damn firm and unwind it, or it should be allowed to fail on its own. Keeping it on limping, hemorrhaging more capital from the Treasury to no purpose, is an abomination.

The value is market stability. The value of everything the fed is doing stability. These firms failing outright would touch every segment of the market and knock over dozens of other firms, erode confidence left and right and likely trickle down to retail/consumer banking. Here thar be dragons.

If things look bad now, an alternative where there are runs in the consumer space are outright horrifying as Malor so colorfully points out, and it's not just U.S. centric.

You may not view the Fed's investment in stabilizing the market as a good thing, but it prevents the world economy from locking up like an engine with no oil for a short time in order to get more breathing room. The markets are open, that is a GREAT thing, because it allows the system to try and work this out, and that system needs lots of time to do it. There's no disagreement that I've seen that corrections aren't needed, but the absolute worse thing is outright failure of the worldwide system itself and the biggest risk to that system right now is panic.
posted by iamabot at 10:25 AM on September 17, 2008 [2 favorites]




As long as they move quickly ... market chatter says Buffett is gonna make a bid by COB today. We'll see if it wants it all or just the pretty parts.

Alex, I'll take "just the pretty parts" for $1000.

No way will he take on massive obligations that he cannot quantify, and I don't think even Ramanujan could quantify AIG's exposure in a few days.
posted by zippy at 10:34 AM on September 17, 2008


Stocks Fall as Bank Gloom Persists

Stocks Drop Sharply Despite Bailout of Big Insurer


Believe it or not, this is stable compared with how it would have been had AIG failed, or all three of this weeks troubles failed.
posted by iamabot at 10:55 AM on September 17, 2008


this is stable compared with how it would have been had AIG failed

There's no way of knowing this, obviously, but rather than making a point about whether or not the taxpayer money of our great-great-grandchildren should have been used to "bail out" AIG (a point on which I remain undecided), I was hoping to suggest how little leverage in the post-Bear Stearns era the Fed actually has in soothing market fears: we are running out of ways to keep the situation from spinning out of control. I see no reason to conclude that the market has hit rock bottom yet, and God help us should another big bank or entity like AIG fail in the near future. Back during the Bear Stearns collapse I advocated on another website that any bailouts of investment banks should be at the very least linked to new regulative legislation. That way, the root problem and not just the symptoms, is addressed.
posted by ornate insect at 11:09 AM on September 17, 2008


I'm just glad the fundamentals of the economy are sound.
posted by mazola at 11:29 AM on September 17, 2008 [1 favorite]


Ah just as this thread is getting very interesting I've got to hop out for a meeting (not on this topic but on the subprime housing crash in the UK) but I'll leave this very interesting quote by Hyman Minsky -- "stability is unstable" when referring to Speculative Bubbles in capitalist economies.

Minky's work specified three prime parts to the business cycle.

First, investment as normal but, over time, hedging is introduced to reduce risk (i.e., losses).

Next speculation takes off, as the "normal" corrective mechanisms (i.e., losses) are suppressed by the aforementioned hedging activities.

Finally, what might be called "The Ponzi phase" in which investments can only be justified by the (faulty in hindsight) assumption that prices will continue to rise.

We see this behaviour in every documented bubble, going back some four centuries. Doesn't matter who is in charge, what currency we're using or what the fuss is all about (e.g., real estate, dot com stocks, tulips), Minsky's three steps is a key test we apply to see if it "smells" like a bubble.

So just to look back - Oil? Check. Real estate? Clearly. US REITS in the 60's? Yep. The list goes on and on.
posted by Mutant at 11:43 AM on September 17, 2008 [8 favorites]


Back during the Bear Stearns collapse I advocated on another website that any bailouts of investment banks should be at the very least linked to new regulative legislation.

I agree with this sentiment, but it would be hard (maybe impossible?) to balance the need for quick and decisive intervention by the Fed/Treasury and the desire to craft effective legislation to bring about new regulations. Certainly new legislation will be forthcoming but it's likely to be obsolete by the time it becomes law. I don't think that means its unnecessary, but it's not likely to help much during the next crisis.
posted by mullacc at 12:00 PM on September 17, 2008


Long term "stability" may be "unstable", but in the immediate future it's needed for breathing room to work our way out of the crisis so the system can fail without dropping the world economy more violently than it otherwise needs to be dropped.
posted by iamabot at 12:05 PM on September 17, 2008


I blame it all on Buckminster Fuller for inventing the bubble house.
posted by dances_with_sneetches at 12:39 PM on September 17, 2008


In the FT, no less:
If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?
FT Blogs
posted by bonaldi at 1:00 PM on September 17, 2008 [1 favorite]


Sorry, for all of the posting from snark to whatever, but I just ran across this bit of news. 3 month bonds fell to 0.01% return today. It was 1.58% last week. People are betting on stuffing their money in the sofa for the short run. Could these actually go negative?
posted by dances_with_sneetches at 1:32 PM on September 17, 2008


Mutant,

My 'moron' comment was more directed at the institutions and the application of their business model rather than at the individuals involved. I think its important to understand that the 'insolvency' that challenged AIG was IMHO, artificial, and since their 'ratings' were a prime determinant in the pricing and the risk of the assets underlying most of the derivative securities.

As I grew up about 20 miles from where you did, so I'm not denigrating 'country boys,' and appreciate your insight in these threads.
posted by sfts2 at 1:40 PM on September 17, 2008


WaMu is dead.
posted by ryoshu at 1:53 PM on September 17, 2008


Related news from across the pond: in a £12bn move, Lloyds TSB have taken over HBOS.

The Times is speculating that this might cost 40,000 UK jobs.
posted by iso_bars at 2:34 PM on September 17, 2008


In other news:

I'm 33 years old. I've been maxing out my retirement stuff (like a Roth IRA) since I was 25.

My IRA is now quite a bit underwater. Yes, my IRA is underwater for its 8 year life. I would have been better off buying hookers and blow.
posted by Justinian at 2:41 PM on September 17, 2008 [2 favorites]


These firms failing outright would touch every segment of the market and knock over dozens of other firms, erode confidence left and right and likely trickle down to retail/consumer banking.

These firms being bailed out will touch every segment of the market, erode dozens of other firms and trickle down to retail/consumer banking. It'll just be less immediately obvious, because you won't be able to point to a half-dozen numbers on a single date and say "see?"
posted by oaf at 2:41 PM on September 17, 2008


I would have been better off buying hookers and blow.

Enjoy the miracle that is dollar-cost-averaging. Don't lose faith now. Think of it as a once-in-a-lifetime everythings-gotta-go sale on the NYSE and NASDAQ.
posted by GuyZero at 2:45 PM on September 17, 2008


These firms being bailed out will touch every segment of the market, erode dozens of other firms and trickle down to retail/consumer banking. It'll just be less immediately obvious, because you won't be able to point to a half-dozen numbers on a single date and say "see?"

No disagreement there, but the efforts being made now buy stability in the form of time to for the market to adjust.

It's all gonna have to come apart, it's a matter of how many lives get dirty in the process, I would argue it's messier and harder to mitigate the damage to areas that don't need correcting if comes apart all at once. When I say stability, I mean to some extent the time to unravel this in as ordered a fashion as possible.
posted by iamabot at 2:46 PM on September 17, 2008


WaMu is dead.

Taken over by the FDIC is dead. This is trying desperately to save themselves from drowning.
posted by smackfu at 2:56 PM on September 17, 2008


Holy shit sfts2 I didn't take that comment personally at all!! Genuinely sorry if my response came across that way, it honestly wasn't intended that way.

I appreciate your comment but no need to apologise at all. In fact let me extend my apologies as I apparently miscommunicated (hmmm - what if Mrs Mutant is right and I didn't leave in time ?!)

PS - There are morons working at the ratings agencies, like you'd run into at any company, large or small. But I think in this case BIG morons for losing a monopoly...
posted by Mutant at 3:18 PM on September 17, 2008


bonaldi, another interesting one from the Financial Times (unfortunately behind a registration wall, sorry -- if you search for the title from the Times' front page you can see the whole thing w/o registering):

This greed was beyond irresponsible
John Gapper, columnist
Financial Times, September 17 2008 19:09
But AIG takes the biscuit. Here was a huge multinational insurance group with a reputation for solid underwriting and risk management that decided to diversify from insuring risks it knew well – car crashes and fires – to covering derivatives it did not understand.

Of course, it thought it understood them. In presentations to investors this year, it emphasised how thoroughly its AIG Financial Products arm assessed the risks of insuring CDOs. It ran all the data and decided that, in the worst case, it risked losing $2.4bn on the portfolio.

Well, $24bn of write-downs later – a mere 10 times its maximum estimate – the company has burned through its equity, spread financial chaos to all corners of the earth and humiliated the US Treasury. The job of insurance companies is to guard others against catastrophes, not cause them.
posted by sdodd at 3:23 PM on September 17, 2008 [5 favorites]


Taken over by the FDIC is dead. This is trying desperately to save themselves from drowning.

The water seems to be rising, and nobody's throwing them a life preserver. They've been trying all week not to drown.
posted by oaf at 3:27 PM on September 17, 2008


So, what caused the drop in t-bill yields?
posted by boo_radley at 3:39 PM on September 17, 2008


So, what caused the drop in t-bill yields?

The spike in overnight LIBOR.
posted by SeizeTheDay at 3:47 PM on September 17, 2008


Think of it as a once-in-a-lifetime everythings-gotta-go sale on the NYSE and NASDAQ.

I guess my lifetime's longer than yours (but you're right about dollar-cost averaging).
posted by kirkaracha at 4:11 PM on September 17, 2008


I guess my lifetime's longer than yours

yeah, well, twice, ok, three times. 7 times if you count the top 20 %age losses and not just the top 10.
posted by GuyZero at 4:28 PM on September 17, 2008




ornate insect's link really seems to be targeted at the common man:
"Hasn't Mr. Market been saying both companies possibly are going to fail? If you put them together, how does that make a better company?"
Thank you mister market!
posted by boo_radley at 4:34 PM on September 17, 2008


For what it's worth, boo_radley's quote was attributed in the article to someone identified as "James Ellman, a fund manager and president of SeaCliff Capital in San Francisco." So it would seem Mr. Market may drive Mr. Ellman over a sea cliff. Har Har.
posted by ornate insect at 4:49 PM on September 17, 2008


The gossip is that Mister Market has been having an affair with Miss Management.
posted by UbuRoivas at 4:57 PM on September 17, 2008 [3 favorites]


The gossip is that Mister Market has been having an affair with Miss Management.

That's a Treasury of gossip you've been Fed. But Dow has the Jones for Little Miss Management. He meets her behind Hedges and Derives much pleasure. But he's really Sub Prime as a suitor. He Trades on her weakness, screws like a Bear but feeds her a lot of Bull: the Standard romantic nonsense pours (re: "Poor's") out of him. But it's really a love triangle with Mr. Scott Free, who gets them all off every time. He masturbates on a cash register and comes to money. And you thought Ken was a good Lay.

posted by ornate insect at 5:13 PM on September 17, 2008 [3 favorites]


wow, what a bourse tard.
posted by UbuRoivas at 5:23 PM on September 17, 2008


It seems like all the news is either hurricanes, flooding or stock markets. It's all for wetter or bourse around here any more.

...

I'm leaving now. I'm sorry.
posted by boo_radley at 5:26 PM on September 17, 2008 [1 favorite]




But AIG takes the biscuit


eeew
posted by troy at 5:55 PM on September 17, 2008 [1 favorite]






Thank you mister market!

FWIW, the cutesy 'Mr. Market' stuff originates from Ben Graham's Intelligent Investor, considered by many to be the most important book on investing.

posted by mullacc at 7:07 PM on September 17, 2008


--Investors betting Wall Street is busted: The world is quickly coming to a view expressed by CIBC World Markets CEO Richard Nesbitt at a conference on Monday. Mr. Nesbitt said: “I don't think around the world there's any place for a large investment bank unless they're part of a commercial bank. I don't think they'll exist, except for the very, very tiny investment dealers.”

--Wall Street's Just Deserts

--Washington Mutual pressured as economic storm intensifies

--Constellation Energy Group Up for Sale (incidentally, it's where the president's son-in-law works)
posted by ornate insect at 7:15 PM on September 17, 2008


A New Role for the Fed: Investor of Last Resort

...Instead of just setting monetary policy in its Ivory Tower-like setting, the Fed now must wear several hats — that of insurance conglomerate, investment banker and even hedge fund manager.

“This is unique, and the Fed has never done something like this before,” said Allan Meltzer, a professor of economics at Carnegie-Mellon University and author of a sweeping history of the Federal Reserve. “If you go all the way back to 1921, when farms were failing and Congress was leaning on the Fed to bail them out, the Fed always said ‘It’s not our business.’ It never regarded itself as an all-purpose agency.”

The Fed has often been described as the nation’s lender of last resort — the one institution that would lend money when everything else had failed. But by acquiring almost 80 percent of A.I.G. in exchange for lending it $85 billion, and holding $29 billion in securities once owned by Bear Stearns, the Fed is now becoming the investor of last resort as well.

posted by ornate insect at 7:27 PM on September 17, 2008 [1 favorite]


What Regular People Can Do to Protect Their Money

"Do nothing."

What a shocker. It'll be a cold day in Hell before the MSM ever suggests gold or silver. Who would want to hedge against inflation? It's not like the currency is in any danger. Precious Metals - strictly for the tinfoil hat wearers.

And not a word about this printed at the supposedly libertarian Reason, dedicated to "Free Minds and Free Markets." Lots of anti-Obama and sympathetic Palin crap, though.

Don't let me interrupt your groveling before the Leviathan; this won't interest you. Since I suspect most MetaFilter readers are not too familiar with the layout at Reason, here are some links from this week's blog:

1

2

3

4

5

6

7

8

9
posted by BigSky at 9:43 PM on September 17, 2008


Oh yes, the blog (where the AIG and other Wall St. measures were not discussed much, despite unprecedented govt. intervention) is what everyone sees first at Reason. And no one had to prod the blog section editor to be fair and list McCain's mistaken foreign policy stances, as seen by Foreign Policy magazine. The comments have not been ridiculously pro-Palin.

From the front page, however, comes this:

Second article listed from the top now, the top one for most of the day, as the market tanked. This was what Reason's editor's saw as the most important thing to write about, even as the nation's largest insurance company was in effect nationalized.


A Great Moment for Women
Why Sarah Palin is good for America
Cathy Young (9/17)


Yeah, there's the Palin should be OK with pot thing underneath, but y'all feel that way about everybody (despite running a curious article recently in which someone argued that the drinking age should remain at 21--an oversight, I suppose, or something contractual screwing things up). That's a given.
posted by raysmj at 10:33 PM on September 17, 2008


gold lost like 25% of it's value over the past couple months. But hey, it went up 10% yesterday, and I'm sure the sky's the limit on this totally rock solid safe investment.
posted by delmoi at 10:34 PM on September 17, 2008


Oh, yeah Reason: You finally got around to discussing the AIG intervention (which was being discussed much earlier) at 10-11 a.m. today. That's two days in Internet hours. But at least Palin's good for women, despite that bit about making women pay for rape victim kits.
posted by raysmj at 10:50 PM on September 17, 2008


btw, Moscow shuts down their stock exchange

Singapore has a run on AIG

oh and dad's weeping over Merril Lynch as mom keeps saying "I told you so" (er, no link)
posted by infini at 11:31 PM on September 17, 2008


I'm sure the sky's the limit on this totally rock solid safe investment.

It isn't a rock solid safe investment, far from it. Gold and silver are very volatile. But I'm not suggesting them as an alternative to CDs. They are a hedge against inflation. A strong case can be made that the federal government under reports inflation by about three percentage points. One of the more common forecasts for the next few years, is that we are entering a period of high inflation, perhaps one that will eclipse the Carter presidency. And yet, no one in the MSM ever considers gold or silver to be a worthwhile investment. But, "Do nothing.", that's good advice.

You finally got around to discussing the AIG intervention (which was being discussed much earlier) at 10-11 a.m. today.

I am not an apologist for Reason, I certainly don't sign off on every last thing they write. Reason /= me. The above links are just there to show that Libertarians are not trying to avoid the subject. I suspect that it is getting comparatively little play there because there is little to discuss. Sooner or later, they'll probably do an article. Subscription? It's just not a subject of much controversy; disgust, sure. Many Libertarians have seen this coming for some time, and they have expressed plenty of outrage over this administration's complete lack of fiscal prudence. If you're really looking for the Libertarian take on these last few days' events, google around a little. Here's a couple:

1

2

3 - Now, I'm not a huge Lew Rockwell fan, but I will post the following for illustrative purposes.

September 16, 2008
More National Socialism
Posted by Lew Rockwell at September 16, 2008 07:49 PM

The Federal Reserve is printing up $80 billion for AIG in return for 80% ownership. In other words, the people pay, as usual, to save the power elite's bacon. (Thanks to Tom Lombardi)
-
That's pretty clear, isn't it?
posted by BigSky at 11:55 PM on September 17, 2008


Gold went down 25% because of all the hedge funds blowing up from short squeezes. If you think it's hard to get money for banks alone (check the TED spread), then imagine how much harder it is for hedge funds. They had to liquidate not just their shit assets, but their good ones as well (gold).
posted by amuseDetachment at 12:34 AM on September 18, 2008


The Federal Reserve is printing up $80 billion for AIG in return for 80% ownership.

not to get into the debate about how great Reason is, but I find it strange that everyone thinks the Fed is "printing" this $85B LOC.

For one, they've announced a $40B special issue that is going to come up for auction RSN, and that AIG may not have to tap much of the LOC to liquidate itself.

Also, the Fed has driven the money supply from $4T to $14T over the past 13 years, so in these deflationary times I think hand-wringing about the Fed adding to its directly-held treasuries is somewhat premature if not unfounded.
posted by troy at 1:07 AM on September 18, 2008


"The paper market is burning" (link to CNBC interview)
posted by MarkO at 1:07 AM on September 18, 2008


Gold went down 25% because of all the hedge funds blowing up from short squeezes

It also went down because its intrinsic value -- for jewelry -- is about $500/oz.

Looking for an inflation hedge when the long bond is paying 4% seems, again, a bit premature.

But I suppose if you're going to panic, panic first.
posted by troy at 1:10 AM on September 18, 2008


I find it strange that everyone thinks the Fed is "printing" this $85B LOC.

I agree, the language is hyperbolic. In my opinion, the references to printing the money are simply expressions of distrust in the Federal Reserve and concern that we are heading towards hyper-inflation.
posted by BigSky at 3:50 AM on September 18, 2008


I find it strange that everyone thinks the Fed is "printing" this $85B LOC.

Actually, it's the effort to inject $247 billion into world markets that makes me nervous. Especially with more than a few banks still teetering - will we have anything left for WaMu, Wachovia, Citi? Who else is too big to fail?

Is the Fed borrowing $$ from the Treasury considered normal? I mean, not that anything that's happened this week has been normal. But it seems pretty damned early in this whole wind-down process for the Fed to be, y'know, running out of money. I hope I'm just misunderstanding the whole thing, but the more I learn, the worse this all sounds.
posted by pikachulolita at 4:53 AM on September 18, 2008


Crap, scratch that last link - I meant to link to this: Treasury to provide cash to Fed market liquidity operations
posted by pikachulolita at 5:03 AM on September 18, 2008


Ok another interesting day is shaping up. Here's what we know after digesting the overnights.

First of all, all Fed actions to date are what's called "sterilized" - that is, non inflationary. They aren't, as many upthread have correctly pointed out "just printing money". More properly, they are sopping up dollars that as troy correctly pointed out, already exist.

We're seeing a flight to quality, in particular at the short end (i.e., 3M) of the yield curve with the current yield at an historic 0.07%. Compare this to six month money where investors will be rewarded with about 0.85% (as of 1PM BST).

What's happening is large numbers of people are so concerned about market stability that they're will to accept almost ZERO returns in order to insure preservation of capital. US Government securities, of course, being the safest liquid form of investment at present.

But this has been noticed; yesterday The Treasury announced what's called The Supplementary Financing Program; essentially a credit line The Fed can draw upon. This line of credit will be financed by Treasury auctioning off T-Bills in addition to the regular, Monday auctioning of three and six month bills that takes place every week.

The Treasury departments official announcement: "The program will consist of a series of Treasury bills, apart from Treasury's current borrowing programs, which will provide cash for use in the Federal Reserve initiatives".


We're seeing an unprecedented level of public coordination between Treasury and The Fed. Paulson and Bernanke clearly work very well together, and have solid teams with their fingers deep into the markets.

Further, they are pushing this coordination and integration out into the wider G7 and indeed the G20; colleagues of mine on the treasury desk (group that provides a lot of an Investment Banks funding) are reporting unprecedented access to key decision making staff and BOE and ECB, in addition to the regular teleconferences that I reported earlier.

Under Bernanke we're also seeing global coordination and integration of activity being taken to a new level.

Previous rumours of coordinated Central Bank actions have now been confirmed, with direct injections of sterilized money being favoured over interest rate cuts. This clearly give banks such as BOE (base rate 5%) or the ECB (base rate 4.25%) some room to maneuver should future conditions warrant.

The Fed has opened what's called swap lines (i.e., reciprocal lending arrangements) with their counterparts at Central Banks in The Eurozone, England, Japan, Canada and Switzerland. Funds available tally up as:
  • ECB $110B (billion)
  • Switzerland $27B
  • Bank of Japan $60B
  • Bank of England $40B
  • Bank of Canada $10B
At the same time internal Central Bank actions include The ECB today opening a facility to provide 25B Euros in overnight loans (repo, so collateralised and sterilized), and BOE providing £66.2B billion pounds in one-week loan (repo). This information is harder to come by as not all Central Banks are as fully open and transparent as The Federal Reserve, so there are probably other actions that we don't know of to date.

In terms of markets, at of 1PM BST The Nikkei got spanked again, down about 2.2%, but The FTSE is trading up about 1.62% and The DAX is up about 1.26%.

S&P 500 futures are trading up about 19 points and NASDAQ futures contracts about 26 points, so if this holds look for a nice bounce up at the open. Whether or not its sustainable depends on what the boys in New York get up to.
posted by Mutant at 5:14 AM on September 18, 2008 [5 favorites]


First of all, all Fed actions to date are what's called "sterilized" - that is, non inflationary.

Sure it's not simply "printing money", but I am rather skeptical that it can justly be called absolutely "not inflationary". Transforming illiquid credit derivatives into something as good as cash seems like something that would be supportive of continued inflation, even if only in that it makes deflationary outcomes less likely.
posted by sfenders at 5:25 AM on September 18, 2008


sfenders -- "Sure it's not simply "printing money", but I am rather skeptical that it can justly be called absolutely "not inflationary". Transforming illiquid credit derivatives into something as good as cash seems like something that would be supportive of continued inflation, even if only in that it makes deflationary outcomes less likely."

Well, I understand your point but let's look closer at what's going on. I realise your background but I'll toss in some more detail so folks can get the bigger picture at what The Fed, in concert with Treasury, is currently up to.

Before Bernanke just about the only way a bank could approach The Fed for short term loans (if it needed liquidity and couldn't get the cash on the open market, it happens even in robust economic conditions) was to utliise The Discount Window, which has been in place since at least 1913.

However The Fed tried to discourage frequent and repeated use of this facility, preferring that banks supplement their liquidity via the interbank money markets. Reflecting this preference, The Fed intentionally made The Discount Window a relatively expensive source of capital. The Discount Window was most often used during times of systemic stress. The events of 911, for example, saw The Fed aggressively utilise this mechanism - shortly before the attack borrowing from at the window ran a little under $200 million. And on September 12th the first day after the attack lending surged to a (then) record of $45.6 billion.

But Bernanke et al were very concerned about The Discount Window's ability to provide short term loans in periods of systemic stress, particularly given the growth of Credit Derivatives, Structured Products, etc. We know this from research papers published by The Fed, which collectively contradict what some might opine (not yourself, sfenders, I'm just correcting some of the more eregious misinformation that's oft repeated here on MeFi) about The Fed and even Treasury not knowing what was going on in the Capital Markets.

Specifically, we know that most (not all though) of Bernanke's thinking on this subject is influenced by Small & Clouse (2004) -- Small, D., H., Clouse, J. A., 2004, 'The Scope of Monetary Policy Action Authorized under the Federal Reserve', Board of Governors of the Federal Reserve System [ .pdf ].

These new tools, deployed by The Fed under Bernanke are intended to help financial institutions manage their balance sheets. Amoung these new tools are:
  1. The Term Discount Window Program, or TDWP which offers collateralized loans to borrowing banks. Like The Discount Window, US Government Securities or high quality corporate bonds are accepted as collateral, but unlike The Discount Window, the TDWP allows institutions to borrow for up to thirty days. Even so, borrowing institutions must roll over, or renew loans obtained under the TDWP on a daily or weekly basis.
  2. The Term Auction Facility, or TAF, is very similar to the TDWP but markedly broadens the collateral that may be used for loans. Controversially, the TAF allows banks to pledge Mortgage Backed Securities - even those backed by sub-prime loans - as collateral for loans.
  3. The Term Securities Lending Facility, or TSLF is very similar to the TAF, however it is directed at a subset of banks known as "Primary Dealers", or institutions who deal directly with The Fed as part of regular treasury auctions.
So all of these tools, including both the pre-existing Discount Window and the newly announced Supplementary Financing Program, are tools that help financial institutions maintain liquidity. Sidenote: Bernanke hasn't exhausted all policy options on the table at present, according to

Contrary to some misinformation in other threads, The Fed isn't accepting assets at par or face value for these loans, but instead are risk weighting funds offered.

I'm not specifically certain what weightings The Fed is applying, but ECB, for example [.pdf, somewhat out of date], may only lend at most 82% of ten year zero coupon, or only 75% of a less liquid bond, one that's carrying covenants or other restrictions. At most. And this ceiling will be adjusted downward to reflect factors specific to the security / issue being presented for collateral.

Those are bank weightings, by the way; hedge funds would be treated rather differently and in fact we're hearing rumours about many funds getting hit - hard - by the recent liquidity problems.

But the key word is loan. The Treasury isn't printing money to fund these loans, and any cash distributed to financial institutions must be paid back with interest.

I accept that many of the Credit Derivatives offered up as collateral may be relatively illiquid, however these derivatives are tangible assets (residing as they are on the firms balance sheet) and thus have an intrinsic value. I'd maintain that liquidity is another topic.

Now if The Fed starts to push out the term of these loans, I think then a strong case could be made that these new tools are indeed inflationary. I'd certainly be arguing those actions were inflationary, almost by definition.
posted by Mutant at 7:01 AM on September 18, 2008 [1 favorite]


Mutant, I found this chart of the Fed's collateral margins, not sure how current it is.
posted by troy at 7:35 AM on September 18, 2008




So according to the chart posted by troy, which might be out of date, the fed is accepting mortgage backed securities at 90% of their "value" as collateral for loans.
Therefore, correct me if I'm wrong, this helps them get through the current crisis, but ultimately they are likely being lent money they will be unable to repay, based upon collateral that is overpriced.

We're just kicking the ball down the street, no?
posted by slickvaguely at 8:22 AM on September 18, 2008


Bernanke is fighting a liquidity issue, but aren't we have a solvency crisis?
posted by ryoshu at 9:02 AM on September 18, 2008


I enjoyed Doug Diamond and Anil Kashyap's explanation in the Freakonomics blog of what the hell has been happening.

Any smart people here want to fill in the rest of us as to what they got wrong and/or oversimplified?
posted by togdon at 10:02 AM on September 18, 2008 [1 favorite]


So after the Lloyds buy-out of HBOS, a lot of politicians were blaming the bank's collapse on short-selling (it wasn't: word is they were finished by Friday if a deal hadn't been found). Now the FSA is to announce a suspension of all short-selling from midnight tonight. Hm.
posted by bonaldi at 10:02 AM on September 18, 2008


sorry, share-price collapse.
posted by bonaldi at 10:03 AM on September 18, 2008


Mutant: But the key word is loan. The Treasury isn't printing money to fund these loans, and any cash distributed to financial institutions must be paid back with interest.

The same is true of my home mortgage. Also a loan backed by a tangible asset with an intrinsic value, and for a term that is considerably shorter (as is usual in Canada) than the time over which it's expected to be repaid. The Fed may do things differently when it comes to funding their various lending activities, but from the point of view of the rest of the market the effect ought to be not all that different in principle from what happens when I take out a home equity loan.

Now if The Fed starts to push out the term of these loans, I think then a strong case could be made that these new tools are indeed inflationary.

They could get quite a lot more inflationary than they have so far, that's for sure. But whether they increase the amount of money they lend directly, or lower interest rates to encourage others to do so, I'd don't see any essential difference in terms of generating inflation. It's just a matter of degree. Maybe they haven't gotten close to the point where it would be inflationary in a direct way to any degree that's actually noticeable, and certainly liquidity is another angle to look at all these actions, and a more important one. Even so, it's directly inflationary at the margin at least a little tiny bit, and indirectly so in keeping the engines of inflation running. So it seems to me, but my ignorance of these matters is profound.
posted by sfenders at 10:57 AM on September 18, 2008


Any smart people here want to fill in the rest of us as to what they got wrong and/or oversimplified?

Seems pretty detailed & accurate, though I would add that during the boom years 2003-2007 $800B to over a $1,000B of mortgage lending went out, and lenders and their subscribers will be lucky to get .50 on the dollar for much of it.

From the latest Federal Flow of Funds, here's the net mortgage lending that went out each year:

2002 6422.6
2003 7213.7 (+$800B)
2004 8254.8 (+$1.0T)
2005 9352.7 ($1.1T)
2006 10423.9 (+$1.1T)
2007 11128.7 (+$700B)
2Q08 11215.4 (+$170B annualized)

Roubini, basically the most pessimistic analysts around, says perhaps $2T of this lending will prove to be losses. Given the over $4T of new lending since 2002 (the last sane year WRT underwriting standards), this is certainly possible if not probable.

As of last week I didn't fully comprehend what this debt overhang really meant, but the past 2 weeks have certainly . . . clarified things. What happened over the past two weeks was a process I thought would likely take months.
posted by troy at 11:23 AM on September 18, 2008


oops, the above table shows the total amount of mortgages outstanding at the end of the period
posted by troy at 11:24 AM on September 18, 2008


the absolute worse thing is outright failure of the worldwide system itself

Says you.

Is anyone else rooting for a total collapse of the "economy" and the resultant famine, disease, pestilence, and the end of civilization as we know it?

I saw a Google bus the other day that had been wrapped in what appeared to be black leather armor. Have the riots started yet?

We're just kicking the ball down the street, no?

Yes. I get your meaning, but aside from the bogus financial hocus pocus, what is seeming to happen on a macro level is that people who honestly pay their taxes and save money diligently in low-interest "secure" investments like savings accounts for retirement or a house we'll never be able to afford are getting royally shafted (again) by the federal government and all of the financial institutions that we are required to use in order to earn a salary to provide our subsistence living. And we will continue to get shafted again and again, while the people who are allowed to borrow money at will and capitalize on all transactions involved in the government-subsidized financial infrastructure continue to rake in the fat louies.

We don't want to "socialize" health care, but we have a "market economy" with centrally planned finance and insurance companies. God Bless America.

Don’t worry, Man U will be fine.

Ah, so what's all the fuss about then?

So even for people whose own circumstances have not much changed, the cost of the credit is going to rise.

So I can't buy a house I can't afford. Big deal.

I suppose the big deal will come when the trickle down effects of the financial institutions's colossal fuckups creates job loss and I'm unemployed. I'll worry about that then, I suppose.

That Freakonomics blog post was very informative. Thanks.
posted by mrgrimm at 11:51 AM on September 18, 2008 [1 favorite]


WSJ reporting that Citigroup is hiring Mark G. Shafir as a new top mergers-and-acquisitions banker. Shafir had been global co-head of M&A at Lehman. Full article coming shortly.

**

Morgan Stanley seeks buyers

**

Morgan Stanley in Talks with China's CITIC

**

Markets remain uneasy after central bank moves
The worry in the markets had led to speculation about the future of such major players as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley. Media reports have been saying that Wells Fargo & Co. and Citigroup Inc. are interested in a possible takeover of Washington Mutual; and a person familiar with the negotiations said Morgan Stanley and Wachovia Corp. are in talks about a possible combination.

**

Credit market meltdown
posted by ornate insect at 11:54 AM on September 18, 2008


Gold and silver are very volatile. But I'm not suggesting them as an alternative to CDs. They are a hedge against inflation.

They're best, of course, when hoarded intravenously.

An investment in gold 6 months ago would now be worth 15% less than it was when you bought it; until a week ago, it would have been worth 25% less than what you paid for it. If you'd invested in it the early 80's, your investment now would still be worth less than what you paid for it. It's not a hedge against anything, it's a commodity investment like anything else, and over anything but the shortest of timetables involving the most dire of markets, it's going to be out-performed by any vanilla index fund. If you're concerned, find a savings fund that pays you 3% guaranteed. If you're OMGWORLENDINGMARKETCRASH concerned, you should withdraw your entire portfolio and spend the proceeds on MREs and ammunition.
posted by Mayor West at 11:58 AM on September 18, 2008 [2 favorites]






FWIW, chunking express's link above refers to the Gramm-Leach-Bliley Financial Services Modernization Act (more on it here) of 1999, and that Act was partly authored by Phil Gramm, who until recently was McCain's top economic advisor (and is now infamous for his "Nation of whiners" quote).
posted by ornate insect at 12:34 PM on September 18, 2008


Get ready for Resolution Trust Corp 2: Electric Boogaloo.
posted by PenDevil at 1:04 PM on September 18, 2008


So the Dow just rallied 400 pts on a rumor of proposed legislation creating an entity to eat the bad debt. Man, those folks on Wall St are hard up for good news.

We're just kicking the ball down the street, no?

Yes. I get your meaning,...



I'm glad you get my meaning, mrgrimm, but I'm afraid I didn't understand a word of what you said.

And Mayor West, how about a plain vanilla fund, like an S&P index fund invested ten years ago, which would now be worth less than you originally put into it, NOT adjusted for inflation. Gold and Silver, whether bullion or stocks are a healthy part of any balanced portfolio.
posted by slickvaguely at 1:27 PM on September 18, 2008


If you'd invested in it the early 80's, your investment now would still be worth less than what you paid for it.

So, it was worth a lot in the early 80's? I wonder what else was going on in the economy at that time.

it's going to be out-performed by any vanilla index fund

I'm sure there are time frames and where an index fund outperforms gold. But index funds themselves might do quite a bit worse than advertised. Take a look here. Sure it's still compound interest, but inflation takes a sizable bite. Back to gold, what was its price during the last period of high inflation, in inflation adjusted dollars? Does an index fund look like a better choice right now? Perhaps it does. I'm not trying to evangelize, I just think it merits mention as an option at the very least. But different strokes for different folks, you pays your money and you takes your chances, etc. I hope your choices produce sizable returns. And I do agree that stocking up on ammunition and MREs is a prudent move. Picking up some spare water filters is another sharp play.
posted by BigSky at 2:00 PM on September 18, 2008


And I do agree that stocking up on ammunition and MREs is a prudent move. Picking up some spare water filters is another sharp play.

Still holding out hope for Ron "Survivalist" Paul, huh.
posted by Blazecock Pileon at 4:14 PM on September 18, 2008


Still holding out hope for Ron "Survivalist" Paul, huh.

Uh, no. I'm no survivalist, those comments are tongue in cheek.

It would be fantastic if a small government conservative was to take the White House. Tough times would still be ahead, several years worth, but at least we wouldn't be going backwards. And of course, there's no chance of that. We've largely come to believe that the State will respond to our hardships and provide. Reality will catch up, and then, despite all the promises and all the good intentions, some of the weakest and most vulnerable are going to get thrown under the bus. Making promises we can't keep (Social Security, Medicare, Medicaid, Universal Health Care?) + hamstringing our economy (higher taxes, bailouts, subsidies, new regulatory agencies) = senior citizens eating Alpo. Now, that's being a survivalist, however it probably isn't the picture you had in mind. Disaster still looms but folks won't need Rambo knives, just can openers.

Naw, no hope here for the economy to improve, nor any that the civil liberty issues will be addressed and the war-mongering moderated...

And you're the "compassionate" one. Kinda funny in the abstract, but more dismal than anything else.
posted by BigSky at 5:26 PM on September 18, 2008


Uh, no. I'm no survivalist, those comments are tongue in cheek.

Tongue-in-cheek. Like his racist newsletter, got it.
posted by Blazecock Pileon at 9:49 PM on September 18, 2008


Making promises we can't keep (Social Security, Medicare, Medicaid, Universal Health Care?)

Pretty much every other country on the planet manages to pull that off. Maybe the answer isn't libertarian voodoo, but asking people how they get shit done.
posted by chunking express at 9:56 PM on September 18, 2008


Let's save money NOW: Cut the war in Iraq and cut the War on the Drugs!
posted by dawiz at 10:30 PM on September 18, 2008


Owning 80% of AIG is nice and all, but I'd rather have universal health care.
posted by kirkaracha at 10:58 PM on September 18, 2008


Like his racist newsletter, got it.

LOL. I had a feeling that you were just looking to work that in. Don't stop there, go for it!

Post a link! Yuck it up! Indulge your fixation!

Be a good citizen! Clue the ignorant in!

It makes you look discerning, sharp. Like you know what to look for.

This would make a great avatar for you. It's a dead-on representation. You have found your fixed point, and the earth will move!

-----

Maybe the answer isn't libertarian voodoo, but asking people how they get shit done.

Voodoo? Just being catty, or are you actually talking about something? If so, what is it?

Go to Canada, go to the Scandinavian Socialist Republics, go to any Worker's Paradise you like, ask whomever you want, let's see them make this work.

Note: this is before the "recent unpleasantness" in the markets. And of course, it looks like either candidate will throw plenty more money around if they should happen to win. Maybe all us free market types are wrong though, perhaps more taxes and more entitlements will add up to prosperity. So, good luck with that. If 2015 rolls around and the trend has turned for the forseeable future, no one will be more impressed than me.
posted by BigSky at 11:15 PM on September 18, 2008


So, it was worth a lot in the early 80's? I wonder what else was going on in the economy at that time.

You're right, of course: that bubble did correlate with some crazy inflation happening in the early 80's. The thing is, investment in precious metals only makes sense if you're looking at what (for most people) is a weird investment time-table: you have to be thinking short-term, you need your assets to be totally liquidatable, and you have to sincerely believe that inflation is either about to become bad, or stay bad for the timetable of the investment. That doesn't happen all that often, because inflation is wildly unpredictable, and is usually the first thing the Fed tries to target. The combination of those three factors seems like it would affect only a vanishingly small number of people.

Take a look here. Sure it's still compound interest, but inflation takes a sizable bite.

I'm a little confused as to where you're going with this graph... it's already inflation-adjusted. It just shows that, once you smooth out the ripples, the Dow will pretty consistently provide you with 1.64% interest above and above inflation. As my econ 101 teacher in undergrad liked to point out at every possible opportunity, there is no 10-year time period in American history where an investment in an index fund that captured as much of the stock market as possible would not have outperformed every other investment option available for the same interval. That holds even for 10-year intervals that include, say, 1929, or 1987.

So, while things look fairly dire this week, I'm not yet sold on liquidating everything, buying gold bricks, and stuffing them into a mattress. The stock market is a remarkably adaptive creature, and I think treating this month as the ultimate opportunity to buy low might very well pan out in a year or five.
posted by Mayor West at 4:16 AM on September 19, 2008


Voodoo? Just being catty, or are you actually talking about something? If so, what is it?

What chunking express means, I think, is that your "promises we can't keep" argument doesn't hold in the minor case of every other advanced industrial democracy in the world.

Go to Canada, go to the Scandinavian Socialist Republics, go to any Worker's Paradise you like, ask whomever you want, let's see them make this work.

They're making it work now. They've been making it work for decades. Apart from demographic problems related to old folks, they show every sign of continuing to make it work.

Maybe all us free market types are wrong though, perhaps more taxes and more entitlements will add up to prosperity.

Hayek thought so; it's right there in The Road to Serfdom. Is he free-market enough for you?
posted by ROU_Xenophobe at 5:26 AM on September 19, 2008


AIG just hit $4.15 pre-market. That's the equivalent of $20.75/share before the government stepped in.
posted by delmoi at 5:47 AM on September 19, 2008


The thing is, investment in precious metals only makes sense if you're looking at what (for most people) is a weird investment time-table: you have to be thinking short-term, you need your assets to be totally liquidatable, and you have to sincerely believe that inflation is either about to become bad, or stay bad for the timetable of the investment. That doesn't happen all that often, because inflation is wildly unpredictable, and is usually the first thing the Fed tries to target.

I'm not arguing with this. It's because I think there is a very real chance of inflation getting bad that precious metals deserve consideration. This isn't about me urging everyone to liquidate all positions and stock up on bullion. Only that I find it a bit strange that it gets almost no mention in mainstream personal finance.

I'm a little confused as to where you're going with this graph...

Because I think index funds get talked up a bit more than their due. If you think that the 1.64% average rate of increase will continue, then moderating one's position in the stock market would be wise:

"One way to get there (revert to the mean) is for the nominal DOW to stay about where it is at 85 on the chart above -- that's 11,000 and change in the actual DOW index price -- and for inflation to rise around 70% for the period. That’s similar to the 1975 to 1983 scenario, but of course two periods are never quite the same." (from the iTulip page)

-----

They're making it work now. They've been making it work for decades. Apart from demographic problems related to old folks, they show every sign of continuing to make it work.

It isn't impossible in the sense of walking through walls. I am aware that other countries provide their citizens with more services.

I posted a link to a graph. Those are our conditions right now. It isn't about what we could do if the situation was different. Our current entitlement programs are not sustainable. I would probably be against Universal Whatever with more promising numbers, but what I'm focusing on here is that the U.S. seems poorly positioned to increase its spending. And I am very skeptical that we will be able to keep the promises we have already made.

Hayek thought so; it's right there in The Road to Serfdom. Is he free-market enough for you?

Prosperity, as in greater production? Please show me.
posted by BigSky at 6:56 AM on September 19, 2008


[Gold..gold...blah blah blah]...And I do agree that stocking up on ammunition and MREs is a prudent move. Picking up some spare water filters is another sharp play.

And also gold. Because in the new world The Ron Paul demands idols cast in his likeness. AND THEY BETTER BE GOLD, BOY.
posted by mullacc at 7:41 AM on September 19, 2008


I'm glad you get my meaning, mrgrimm, but I'm afraid I didn't understand a word of what you said.

It's not that complicated, and pretty obvious to any American alive these days. The deep connections between the financial industry and government have created an environment that rewards certain investors without the requisite risk.

If you're concerned, find a savings fund that pays you 3% guaranteed.

Which is about 50%+ less than real inflation. And that "guaranteed" 3% was 5% a year ago. (Perhaps you're talking about a different "guarantee" than standard bank savings accounts.) I have a feeling I'll be lucky to get 2% next year.
posted by mrgrimm at 7:59 AM on September 19, 2008 [1 favorite]


I'm not at all an expert in economics but this post by Brad DeLong explains the Three Ways of Dealing With Financial Crises in a very accessible way complete with friendly charts. It even gives me hope that the whole house of cards is not about to come tumbling down.
posted by scalefree at 10:57 AM on September 19, 2008


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posted by lunit at 11:55 AM on September 19, 2008


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