An $85 billion bailout for AIG. Incredible. Beyond belief. Is it because AIG has the right connections or because the Fed fears total meltdown in absence of bailout? In either case, it is interesting to consider that $85 billion was the size of the entire federal outlay 50 years ago (current dollars).
Source link: http://archive.mises.org/8531/what-a-difference-50-years-makes/
What a difference 50 years makes
Previous post: Raising Prices Isn’t “Gouging”
Next post: Cory Doctorow on Giving Away Free E-Books and the Morality of “Copying”
{ 16 comments }
Everything being done is due to the desire to avoid the “freeze-up” of the system. I don’t believe there is any concern about inflation, recession, unemployment, etc. The entire focus is the continued “functioning” of the markets (and I use that term loosely). This will continue as long as shells can be moved around the table. Then they will just add more shells.
and the poor get poorer
These bailouts ought to make the list of grievances, a la the Declaration of Independence, explaining reasons for secession. This time around it will be harder since many of the rich and powerful are in with the enemy and the hub of the oppressor is a lot closer. Do those seeking justice and have at least a rudimentary understanding of Leviathan number above the thousands? Would this group stand a chance of survival when the vast majority of Americans are complacent and/or on the dole too? Is the American system to remain more violent than free? What to do now?
It’s odd that for years AIG could reap the profit and now the public must assume the risk.
If you look closely, it’s not such a good deal for AIG. Basically the company is going to be liquidated over a two year period. The feds now own 79.99% of the company. AIG will be paying about 20% on its line of credit. The common and preferred shareholders are likely entirely wiped out.
Likely the only reason AIG agreed to this deal was that they are likely to get more return on the assets through a slow sale than through a fire-sale. They might not even have to use much of the line of Fed credit since having it available establishes their “creditworthiness.”
I don’t support the intervention, or intervention generally, but it’s a misnomer (or a misrepresentation) to call this a bail out.
I think there’s an argument to be made that the slow liquidation will be better for the country than a chapter 11 filing. If AIG had filed tomorrow, a large numbers of banks would have likely followed suit within a few weeks and who knows what would have happened after that. It’s not that threat of cascading defaults that would be most worrisome, however – it would be the political fallout over what happened. Given how insane the right has become, you don’t know what might have happened.
Full disclosure – I work for AIG in the personal lines insurance division.
Bill, economically speaking, it would be the most beneficial for the average person (financially speaking) if every single bank, and this entire fraudulent system went bankrupt tomorrow. I recommend you read Rothbard’s “The Great Depression” to understand just how important recessions are in benefiting the economy, as long as they are not intervened in…
As for the political fallout, I doubt thinmgs are gonna get worse than they already are, considering fascism is fast on the approach anyway, at least libertarians will be able to say “I told you so”. THough that is scant consolation…
“The feds now own 79.99% of the company. AIG will be paying about 20% on its line of credit. The common and preferred shareholders are likely entirely wiped out.”
Since AIG is a financial company in a fractioınal reserve system, shareholder equity is not the only issue in a bankruptcy. Yes the company must be liquidated but other people who loaned money to AIG must write them of also. This is the only way a deflation can occur. That is called returning to reality, and that is the main issue here.
When government takes control they may wipe out shareholder equity but they still guarantee the lenders loans thus preventing deflation.
On the contrary the government is increasing inflation, because there wasn’t enough nominal dollars to cover the debts of AIG in the first place.
They say 85 billion dollars would be enough but I doubt it.
Bill,
“Likely the only reason AIG agreed to this deal was that they are likely to get more return on the assets through a slow sale than through a fire-sale.”
While I probably think you are right when you say this, I don’t think there are any guarantees that this is going to come true. – Just an opinion.
Also, does it not bring up a moral issue, one directly tied with waste and waste over time?
Even if it is true that some of AIG’s assets are probably worth more in current dollars than they otherwise would have received if they were sold quickly; Isn’t propping up the company so they can “pay the bills” for any duration while it is “liquidated” essentially the equivalent of a homeowner in foreclosure being allowed to pay his mortgage with monopoly money so he can stay under the roof to sell his furniture/appliances for real money?
Doesn’t the fact that the assets are not sold quickly extend the time before those same assets can again be used in a more productive manner? Does it not also diminish the attractiveness of good assets that are able to be acquired at bargain prices while forestalling the price setting method for those that otherwise would be worthless?
To me, as a young engineer, relating this to control theory seems to make some sense – albeit in a weird way. It would seem that the Fed is trying to increase the time constant to reach a target, one that can never be the 100% correct target and is always and ever changing. All this while keeping the system completely over damped, never allowing the actual system to ever achieve its equilibrium, ever promoting discontent. I guess that’s where the dislike of “Control” comes from.
And I also agree that the “Right” (if there is such a thing) has become insane.
Gotta love those Marxists at the Fed…
I just hope the Federal employees’ retirement funds are heavily invested in companies like AIG and Lehman.
But that’s OK. McBamma will save us, NOT!
Fred: I understand the logic of Rothbard’s arguments (I actually consider myself more of a Rothbardian than anything else), however I can’t agree that a quick resolution is always better than a slower one if the cost of the former is the destruction of the monetary unit and the devolution of the economy into a barter system, even putting aside socio-political considerations (which I think are actually even more important than purely economic considerations at such a point). I’m not saying these things would have happened if AIG had been forced to file chapter 11 bankruptcy today, but giving you an example where quicker isn’t necessarily better. There’s more than one way to get from point A to point B, and some ways are better than others.
Jeff: There’s lots of moral issues you can raise here, for certain. I don’t know if waste or waste over time are the most important, however, Thank you for the interesting comments.
I think what we are seeing is more a Fabian-like communism or reminds one of the second phase (never realized) of Nazism. Capture businesses, slowly ‘sacrifice’ certain businessmen (nationalization) starting with those who least agree or see through your nefarious schemes (either they want to become your ‘partners’ or want to stop you), speed up the nationalization and blind the rest of society with terms like ‘democracy’, worker-solidarity and the new religion: ‘Patriotism’. Marginalize or co-opt those who see through your plans.
The problem with equating AIG with “banks,” is that insurance companies have _large_ long term assets. and few “liquid” ones. They also, unlike banks, cross insure. I.e., I insure some of your risks, and you insure some of mine. Banks depend on confidence of investors, to maintain their liquidity. Bank liquidity is the amount of money needed for day to day operation. Insurance liquidity is the ability to pay large losses, in a reasonable period of time. Since this is financially impossible for insurance corporations, they “spread the risk.” This is because they may have the assets to pay enormous claims (hurricanes Katrina, Rita, and Ike come to mind), they cannot liquidate the assets quickly enough, except at fire sale prices (which is not good for anyone).
By “reinsuring (sharing the risks), they spread the costs around. But, it also means that if an insurer “goes under,” the costs are spread as well as the loss of investor confidence. AIG had insured many banks against loan losses. They depended on what they were told by _rating agencies_ as to the risks involved. Higher risk, means higher premium costs, due to greater risk of loss. Not knowing that rating agencies, and others were telling less that the full truth about the risks of some mortgages, left them exposed to unanticipated risks. It also put at risk all the “insurance” of every bond out there. A high rating not only lowers the cost of borrowing, it says “you can have confidence that it *will* be paid off.”
No one loans money that is unlikely to be paid back, except at rates disallowed by nearly every state. If I, an investor, am no longer sure about receiving income/repayment, the bond is worth nothing. It does not matter if it will be repaid, if I believe, for whatever reason that it will not.
AIG is/was the king pin to many insurers and banks. Pulling it (allowing it collapse) would have caused the collapse of everything it supported.
“AIG is/was the king pin to many insurers and banks. Pulling it (allowing it collapse) would have caused the collapse of everything it supported.”
Boo Hoo! So much the better. On with the show.
Wow. A weekend without power, and this is what I come back to?
The comments above are mainly concerned with the effects of AIG being bailed out or not — that is, whether they are to be given extra capital to continue to operate to achieve an orderly liquidation. I think it is an unmitigated good for AIG (and its investors and insureds) to receive such a boost of liquidity.
What troubles me is having Treasury in the position whereby they can make such an unprecedented investment of taxpayers’ money. Paulson should be impeached. His actions have been unconstitutional. Even if they were among the enumerated powers, Congress is in control of the purse strings; not Treasury. Congress appropriates the money, Treasury spends it according to those directions.
Is this really the best investment of taxpayer money? I doubt it. If it were, private investors would have been lining up for the opportunity.
Prima facie, this is public expense for private gain.
What a difference 25 years makes! In the span of 25 years the Mises Institute has educated thousands worldwide and laid the foundation for classical liberalism societies should the Keynesian fantasy world collapse!
We are seeing it wash away like a sandcastle when the tide comes in!
Viva the revolution!
Why is it supposed that AIG in bankruptcy court would have resulted in a disorderly settlement of positions or a fire sale? I am not a bankruptcy attorney nor an expert on insurance and insurance regulation, however:
1) A bankruptcy judge would have held the creditors at bay
2) While the holding company would have filed bankruptcy, the various operating companies (by state in the US and by country elsewhere) would have been solvent and functioning
3) The bankruptcy filing would have allowed for new PRIVATE money to come into the company in a priority position to the pre-filing creditors. This would have been a safe bet given the asset side of the ledger
4) A bankruptcy filing of this side would likely have taken years to work through, and under bankruptcy this would be possible
Yes, AIG in bankruptcy would have been devastating to markets — this company insures countless companies and entities for all forms of coverage. The loss of their credit rating would have caused many borrowers to be in default of their credit agreements. Having said that, can it be argued that delaying the inevitable is the best alternative?
Comments on this entry are closed.