Federal Reserve Buys AIG
Tim Iacono
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It's about time the Federal Reserve bought something.
A week ago the Treasury Department effectively bought Fannie Mae (FNM) and Freddie Mac (FRE) and, in return, they got a bunch of stock options and hard-to-trade mortgage securities. They've probably been rummaging through these for the last week and by now, are surely aware of how little they're really worth.
But, they've got the stock options.
As reported by the New York Times a short time ago, the Fed is readying a $85 billion "loan" to giant insurer AIG and, for its generosity, it will get a boatload of stock options and some unspecified amount of hard-to-trade insurance derivatives.
The details:All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that would give it an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.
...
The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.
Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.
But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.
It seems Ben Bernanke's "tough love" lasted less than six hours. Well, that is, not counting the shunning of Lehman Brothers (LEH) over the weekend, whose employees must feel horrible at the moment, seeing the Fed's warm embrace bypass them again.
Probably like you, I'm anxious to see the new Fed balance sheet.
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This article has 42 comments:
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Jackson Cash
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293 Comments
Sep 16 10:19 PM-
phylclar
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4 Comments
Sep 16 10:28 PMA grossly mismanaged company is bailed out and we again as taxpayers will bear the brunt of this cost. The large amounts of money that were made by hundreds of execs at AIG that helped create tonights bailout by greed motivated corporate decisions are just fine and sleeping well tonight.
The moral obligation would have been the same as made the other day with LEH- greed must be eventually paid for- it is a very expensive emotion.
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azcaballer
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16 Comments
Sep 16 10:32 PMThe barbarians are at the gates and the end is near for the American Empire. good luck
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bsharvy
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85 Comments
My Website
Sep 16 10:34 PM-
2houndz
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84 Comments
Sep 16 10:42 PM-
Moses
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49 Comments
Sep 16 10:45 PM-
HumbleCitizen
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1 Comment
Sep 16 10:52 PMIf you are big, and you make a big mess such that not only US but the world suffers (i.e you screwed every one in the world) then we will come to your help. If you are small and make small mess, it's your fault, we won't help you.
So are AIG executives deciding on pay cut or resigning. Are they going to jail? Are they filing for chapter 11? Oh and selling their jets so that they can help the common man what lost money on AIG shares from 70 to $2?
I think there should be strict actions against the leaders of this company (not just removing them from their current position and giving them millions in compensation for screwing up)..
I am loosing faith in these so called Executives who develop STRATEGIES for companies. We can see what they have done not to their own company but to the entire economy of the world. I think an average joe could have done a better job running a company. He would have not made such a royal screw up. I admit, he would have not made sky rocketing profits but it would have been better than today's condition...
After all these our $$ is getting stronger!!!! What in the world is going on?
Should we trust these executives? or our financial institutions? or our beloved Fed and their logic? and our $$ moving forward?
GOD BLESS AMERICA!!
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BxCapricorn
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156 Comments
Sep 16 10:55 PM-
questing4fire
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1 Comment
Sep 16 10:58 PM-
thegreatyakk
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16 Comments
Sep 16 10:58 PM-
What A Farce
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14 Comments
Sep 16 11:12 PM-
VP of Common Sense
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64 Comments
Sep 16 11:12 PM-
williambanzai7
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99 Comments
Sep 16 11:19 PM-
businessguy88
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11 Comments
Sep 16 11:20 PM-
JVJ
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1 Comment
Sep 16 11:20 PM-
Shiv139
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14 Comments
My Website
Sep 16 11:23 PMWhen BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?
Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?
The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).
I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.
In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.
My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.
Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...
The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.
Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.
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Shiv139
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14 Comments
My Website
Sep 16 11:25 PMWhen BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?
Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?
The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).
I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.
In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.
My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.
Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...
The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.
Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.
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trebor
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2 Comments
Sep 16 11:37 PMWhen the dust settles it will behoove those who invest in public companies to pay more attention to what their managers and directors are doing with, or to, the company. IMHO management should be paid in cash, like the other employees, and not with stock options that dilute the common investor. And the amount of cash compensation should be a reasonable base with bonuses pegged to performance. If board members can't impose and enforce reasonable compensation the shareholders should vote in a new board. If investors (particularly the institutional investors who, after all, have most of the clout) want the rights of owners they should exercise the related responsibility. Individual investors might be best served by putting their money in funds where fund managers are "activist".
Just my $.02.
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JLM
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5 Comments
Sep 16 11:38 PM-
Nikola
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91 Comments
Sep 16 11:40 PMWhile it's true the Fed does not trade on NYSE, so its stock can't go to $0.39, the "stock" of the Fed is the USD.
The fact that USD has not collapsed just yet is very, very, very, very, very... very, very, very, very, very interesting. Can we get some analysis here? What the f is going on? And exactly WHEN does the $ go down like LEH stock?
Oh, and BTW, all you whiners who say this is communism, that the government is bailing out the rich at the expense of the taxpayer, shall I remind you that the Fed is a private company. Don't feel so important. This is the rich guys bailing out the rich guys. We are just the spectators.
And while at that, I say, who needs reality TV anymore...... I am just amazed that Hollywood hadn't made a show about "all the major banks failing" before. This is so much fun.
In all seriousness, it's very simple folks. This is a very simple case of "run to the bank" (or selling the stock or calling your loans as it may be in 2008). Things are NOT THAT BAD in the economy that all these investment banks need to fail. But people are scared and lost confidence. And the Fed's job is to restore confidence. Yeah, the bailout is bull. But it's a way to restore the confidence. In fact, the Fed should have bailed out LEH as well. And Ben and Paulson need to come out and say: we will bail out each and every bank/company with more than $10B market cap. We will bail all of them out. Each and every one. Now and in the future. So don't even try running to the bank.
Now get back to work.
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Fools Gold
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2 Comments
Sep 16 11:47 PMThe Bulls get slaughtered
The Bears get slaughtered
The Pigs get slaughtered
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williambanzai7
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99 Comments
Sep 16 11:48 PMCome gather round 'bankers'
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be told to go home
If your job to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like the DOW
For the markets they are a-changin'.
Come analysts and economists
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the markets still in spin
And there's no tellin' who
That it's namin'
For the markets they are a-changin'.
Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's financial meltdown outside
And it is ragin'
It'll soon shake your windows
And rattle your walls
For the markets they are a-changin'.
Come Central Bankers
Throughout the land
And don't criticize
What you can't understand
Those OTC derivative books
Are beyond your command
The old road is
Rapidly agin'
Please get out Bernanke and Paulsen
If you must bail out your friends
For the markets they are a-changin'.
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Mr. Stupid
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81 Comments
Sep 16 11:56 PM-
User 263939
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1 Comment
Sep 17 12:08 AMIt appears the Ponsi scheme is alive and well! don't let the music stop playing.
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Singapore Don
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1 Comment
Sep 17 12:14 AM-
Fools Gold
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2 Comments
Sep 17 12:17 AM-
NObama
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21 Comments
Sep 17 12:45 AM-
Getridofthemnow
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25 Comments
Sep 17 01:00 AMWhat we have called a "liquidity" crisis is not completely accurate. Liquidity is available if there is confidence in the counterparty. Money waits on the sidelines, but when faced with a system and leadership gone amok, it must surely wait for a stabilizing force, or forces; forces yet to arrive. For many, there is simply no longer any confidence; not only in counterparties, but in the "system" itself (read: "How Washington Failed to Rein In Fannie, Freddie" at the Washington Post). Can you hear me now? The SYSTEM is broken.
For those that think FRB and Bernanke are heros, you need to go back and study economics 101. Markets react to incentives. In fact EVERYONE acts on incentives. This is as old as Adam Smith and the Wealth of Nations. The TBTF "incentive" is a very poor one to give teeth to. I am afraid both Ben and Hank have a "savior" complex that needs checking.
This particular crisis was created, regardless of the arguments to the contrary, through a woeful lack of understanding about market incentives, a failure of leadership in the private and public sectors (large commercial banks, GSEs, Congress, and market watchdogs), and a complete lack of understanding for what constitutes the credit and leverage creating process in modern markets. This lack of understanding permitted a "super-bubble&quo... to form that, ultimately, couldn't be anything but confidence eroding. Under former "leadership" massive incentives were created to take spread income into GAAP earnings - particularly over the period of Dec-00 through June-04.
When the curve intermediation (i.e., borrow short and lend long) became more difficult (once the "slow" and measured rate increases began), the intermediation moved en masse off-balance sheet through SIVs and other funding vehicles, an effort to mask the real economic and financial leverage. Commissions were paid, of course, up front, as well as CEO bonuses tied to aforesaid GAAP earnings, not true value creation (and of course, Wall Street mistakes accrual earnings for value creation every day, which explains Warren Buffett's success).
Bernanke, unfortunate for him, inherited this mess, has little real-world experience to handle it (which explains the abdication of FRB financial leadership to Paulson), and has taken steps that, in hindsight, has allowed the TBTF doctrine to become a very tangible reality. I agree with a former post that a study of the Austrian economic school of thought would be helpful (Human Action, by VonMises), and Minsky's text (Stabilizing an Unstable Economy) wouldn't hurt either.
In order to correct the problems, we need less government intervention, not more. We seem to forget this fundamental truth, and instead look to financial market uber-"re-regulato... to "save us". Thank GOD that we have FINALLY (with the Lehman action) decided to let the market start to understand that TBTF isn't a clear-cut proposition, and have begun to unwind the moral hazard problem.
We need to permit failures, and more rapidly, and we need an orderly system for unwinding the bad bets and de-leveraging; however, equity holders (and even hybrid debt holders) may need to suffer, and so it should be. This will require a federal bridge bank organization to be established, a la RTC.
The prescription to for resolving this crisis - more long-term - includes (but is not limited to):
• Smaller, not larger, financial intermediaries. No single firm should imperil the "system"
• Privatized deposit insurance, or a much more risk sensitive public system (I refer reader to "A Mandate for Change", written by FDIC economists many years ago)
• A less aggressive FRB and UST. Non-trivial restraints need to be added, as should now be evident
• A less "fractured" regulatory system, but quite a bit different from Paulson's "blueprint"
• Eradication of the GSE model
• Massively increased transparency and data collection/distributio... could be tied to a "systemic risk" score. More systemically important and potentially risky firms have much more aggressive disclosure requirements
• A totally reformed SEC. Historically, all they care about is compliance, not risk management. This has been a disaster.
• Rapid moves toward international harmonization of accounting rules. FASB/IASB need to come together.
• Debate/reconsideration of GLBA
• Private sector governance of a central OTC clearinghouse. Non-exchange markets HEAVILY regulated and "taxed" via massively increased reg capital. Force business flow to exchanges, daily MTM and settlement, and standard contracts
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James Shaw
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19 Comments
My Website
Sep 17 01:13 AMThey are too big too important to fail.
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TechSavy
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4 Comments
Sep 17 01:15 AMThat is how big AIG is. They are counterparty to billions of $'s worth of CDS contracts. They are major players in the commercial paper market. They are massive players in securtization. Not to mention, they are huge insurance issuers. Instead of having a run on one or two banks, there would have been a huge dislocation of every swap contract in the world that AIG participated in. That would mean that on the other side of every financial contract that in aggregate is in the trillions (my educated guess) nobody would be there to honor it. That is basically like everybody walking into their bank tomorrow and not being sure if the cash they saved (if Americans save anymore) is there.
Lets be clear though, this does not excuse the mismangement of risk at AIG. As an acturial institution, they really dropped the ball here and got way too integrated into financial complexity without fully anticipating the downside scenario. Rip into management, no doubt about it. The treasury though, I would have to say just based off of the surface info here, the deal seems good. Tax dollars are the bridge loan, collecting some interest rate (not sure what) and are the first dollars out, when asset sales are made. We have a tight maintenance covenant package (dividends, preferred stock is restricted payment) and we get warrants to boot, to participate in the upside. I would find it hard to believe that this loan is not going to be money good (par).
Lastly, I wish everybody would just sit back and think before rushing to throw out generic blame at "wall street" and "rich people". It makes you look ignorant and really doesnt do a service to anybody. For every idiot who ran AIG, there are some very brilliant people on the Street who work longer hours then almost all industries and really have the best interests at heart for their clients. Almost all of us in the industry have worked in excess of 100 hr weeks at some point in our lives and many of us continue to work 70-80 hrs weeks in good or bad times. Yes, we get compensated for it and very well might I add. However, we also work hard, most of the lot are very honest people and we worry more about the money we manage then even our own health at times. Don't take the bait of these two moronic candidates who are giving you the soundbite by blaming it on wall street. Most of the housing problems (the biggest issue to date) were caused by a Congress more focused on getting elected by giving power to HUD, uneducated mortgage brokers who were in it for the buck (they are not wall street people) and uneducated and extremely irresponsible American population who not only refused to read the mortgage documents they signed their names to, but claimed ignorance and manipulation more often then accepting personal responsibility for their own finances. Yes, a country is not only about good governing, but also an intelligent populace. Look in the mirror about how you spend your money and accept responsibility. If you spend more then you make you will stretch yourself thin. If you save less then you spend, you will get crushed when we have a recession (they always happen