By on September 16, 2008

Earlier today, Merrill Lynch upgraded GM to “neutral.” The fact that this is the same Merrill Lynch that’s teetering on the brink of bankruptcy, the same Merrill that hoovered-up the remains of GM’s busted deal with FIAT back in 2002 (buying The General’s 5.1 percent share of the Italian automaker at a fire sale price of $1.16b), has absolutely nothing to do with it. Anway, Merrill’s optimism re: GM could be about to disappear; the upgrade was based almost entirely of the possibility that The General will scarf low-interest loans from you-know-who (hint: you). That’s because Uncle Sam has agreed to an $85b loan to insurance giant AIG to stave off bankruptcy (AIG’s, not Uncle Sam’s). This dramatic development could cut one of two ways for GM. The AIG bailout may increase the likelihood that Motown will score its $25b+ federal bonanza (the Daniel Howes “You Saved Wall Street So Why The Hell Not US?” prophecy). Or it will decrease Detroit’s chances of immediate federal assistance significantly (the Holy Shit bailout fatigue non-option). Place your bets now. But as far as your tax dollars or the free market is concerned (the feds now hold an 80 percent share of a formerly private insurance company), any way you look at this, you lose. Who wants to own GM? Not me.

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46 Comments on “Bailout Watch 48: AIG SOS = GM RIP?...”


  • avatar
    romanjetfighter

    I blame all of this on Phil Gramm and greedy investing!!!

  • avatar
    ajla

    No way on Earth this is bad for the domestic auto makers. The government has been basically proving left-and-right that companies’ “we’re too big to fail” attitudes are true.

    If anything I think $85B for AIG (and other federal moves) foreshadows more than $50B for the Big 3 because even more bailouts will come after the original money gets burned through.

    The feds might get on Cerberus’ case and make them sell-off (or invest more in Chrysler) before cutting them too many checks, but the only way I think the governnemt will allow GM or Ford to file Chapter 11 is if the US government has to follow suit right along side them.

  • avatar
    Verbal

    As an American taxpayer, I am proud to be now a part-owner of AIG.

  • avatar
    crackers

    There are a lot more nearly-dead financial institutions with Federally insured deposits that have yet to be accounted for, and the insurance reserve is no way near large enough to cover it all. The D3 may get their first $25B because it has already been budgeted, but bailout fatigue is rapidly becoming critical. Getting any more will become extremely difficult.

  • avatar
    luscious

    What you people fail to understand is this:

    There IS NO 85 BILLION DOLLARS!!!

    Let’s say you own 100 shares of Company X. Company X has a total of 1000 share outstanding. That is, you own 10%.

    Now let’s say Company X prints up 1000 MORE shares.

    Guess what, fool? Your 10% of the company has now been diluted to 5%…and the price of each share, all things being equal, has been cut in half…that is, you’ve just now had 50% of your shares STOLEN from you!

    Well, again there is NO 85 BILLION!!! Instead, 85 Billion Dollars will be Printed up out of THIN AIR…and that 85 Billion dollars which is being “spent” is coming from YOUR WALLET.

    People, it’s called INFLATION…and you can thank the crooked Federal Reserve for this.

    Inflation is NOT “normal”. Do your research and you will see what I speak is the truth. Inflation is the direct theft of your wealth…the wealth you’ve busted your ass to earn.

    $85 Billion? Do you have ANY IDEA how much that is?….and how Worthless your dollar is becoming?

    How many OTHER bailouts have been announced the past few months? I can’t keep track of them all…but people, this “money” is being stolen from you…from the economy at large.

    Remember that when you are living on a fixed income in your elderly years…because, trust me, it is very real!!

  • avatar
    beetlebug

    Gosh, couldn’t we have gotten a few more capitalized words?

    To be a bit serious I’m voting that this will make it easier for Detroit to get it’s guarantees. However, using Lehman Brothers as an example they may throw Chrysler on the pyre.

  • avatar
    Mc

    Phil Gramm’s market deregulation scheme under the Republicans is like Crack Cocain:

    Higher Highs
    Lower Lows

    I prefer the FDR New Deal market regulation scheme, less risk for depression and slow long term growth for everyone.

    Mc

  • avatar
    blindfaith

    What people fail to understand

    Our wealthy government officials and other rich do not have their wealth tied up in American dollars. If you find the hidden money, you will find it will not be in American dollars.

    Hyper-inflation will be the way the U.S. government will solve the trillions dollar debt problem.

  • avatar
    DearS

    I proudly remember saying how learning about economics is important and how Americanos will not step up till the money hits the fan (feds?). I’m glad I’m so addicted to money as much and as materialistic. Its dysfunctional. I wonder if America will be forced to face their worshiping of money and materialism next? We need to through hell if were to recognize heaven.

  • avatar
    NickR

    to stave off bankruptcy (AIG’s, not Uncle Sam’s)

    …yet.

    AIG should have been allowed to fail. Let the chips fall where they may and let’s get this mess sorted out. What the hell business does the federal government have owning 80% of an insurance company.

  • avatar
    Redbarchetta

    The government(WE) now own 80% of an insurance company, sounds like the start of socialized medicine. Since I’m paying for this by having my buying power trashed I want my high deductable insurance dropped to $0, from the $6000 I pay now.

    This looks bad for GM, especially. A small slice of the $25billion will probably be all they see before the government starts to really go broke(I know we are already broke, but the printing press has to stop soon). Even if they say F-off Chrysler and split the $25B for Ford and GM that is only $12.5B for GM, that will only get them through 2009 at the rate they are losing money, then what, hope they find the city of gold.

  • avatar
    NetGenHoon

    Hyper inflation, eh? I’m framing my first One-Billion Double Dollar ($$1,000,000) Bill.

  • avatar
    MikeInCanada

    If you care to skip over the the Wall St. Journal – wsj.com – they put it more succinctly. AIG is more then likely going to pay off the $85Bln loan as they slowly sell assets, Detroit on the other hand will probably never repay any cash shoveled to them by the government.

    If any of the Big 2.8 go bankrupt, there are no assets to sell anyway. Now that’s going to be a screwing.

    At least AIG has its own air force (ILFC) which has a lot of value and can (and probably will be) the first thing sold.

  • avatar
    Pch101

    Let the chips fall where they may and let’s get this mess sorted out.

    That’s easy for you to say. But if they followed that advice and allowed the fit to squarely hit the shan, then you’d be wondering some months from now about what you did to deserve the depression that wiped out your local economy.

    They had no choice. (Note for the future: They’ll also have no choice with Washington Mutual, either, unless someone such as JP Morgan buys it.) They didn’t do it because they wanted to, but because they had to. They could afford to lose Lehman, but they couldn’t lose AIG.

    Instead, 85 Billion Dollars will be Printed up out of THIN AIR

    Not really. It’s highly unlikely that there will be anywhere near $85 billion in cash that is handed over to AIG.

    It remains to be seen how it is done, but I’m going to guess that most of it will probably be an accounting entry, meant to dress up AIG’s books, but with no actual handover of cash. As AIG sells off bits of the company, the loan balance will be reduced accordingly, and AIG can use the cash to strengthen and stabilize its position.

    Unless something badly goes wrong, this should prove to be mostly window dressing, a stall tactic that gives AIG the time that it needs to sell off its pieces.

    There is not much comparison to GM here. GM has nothing to sell off that it could use to repay loans. It doesn’t just want the money for window dressing, but actually wants cash to spend.

    The feds won’t be giving GM what it wants. If there is a bailout, I expect it to resemble something like Bear Stearns, which basically means selling the company to new investors, at the expense of the current ones. There wouldn’t be a place for Rick Wagoner in the new, post-bailout GM.

  • avatar
    Rix

    They had to do it before the election. Likewise, auto bailout has to happen before the election. Because Michigan is critical now. But once the election happens, Michigan is expendable. You think Michigan politicians can help? Dream on. Michigan politicians are worth less than Chrysler.

    That being said, AIG has real assets. Like a thousand commercial jetliners, leased out to airlines. And a massive bond portfolio…AIG can pay off, and will pay off. Chrysler and GM, not so much.

    Personally, I fail to see why the US government should bail out companies that produce more and more in Mexico and Korea. It’s not like the auto industry has shown much loyalty to the US…

  • avatar
    Ken Elias

    AIG and GM have nothing in common. AIG’s deal is a sudden liquidity crisis caused by a lowering of its credit rating forcing it to put up more cash collateral for security on credit default swaps. So it’s short of cash, but not assets. Hence, the big call on cash…for security. AIG has valuable assets that it will be forced to liquidate for loan repayment if needed. The Feds have avoided a massive meltdown in the world’s banking system.

    GM’s cash needs stem from negative cash flow compounded by an extremely weak balance sheet (losses add up) which prevents it from additional borrowings. Equity raise is also doubtful due to the massive dilution required to raise necessary funds. The value of its assets is also somewhat questionable since they are mostly things like intellectual property, brands, and manufacturing capacity. Some of those assets have already been pledged though. A bankruptcy of GM would not lead to massive world disorder, unlike with AIG, as any bankruptcy would be for the parent company and North America only. But that’s a tough pill to swallow given the state of the economy and the political season.

    The fundamental problem for GM is that it isn’t making positive cash flow in America and doesn’t have enough cash to make the investments needed in all the demands on the company to keep up (or catch up) with competitors. The government loan program was a political payoff for accepting higher CAFE requirements down the road. The proposed loan program though is now merely a lifeline to Detroit. But it may not be enough money for GM, and definitely not for Chrysler, to keep them from tanking unless there’s a big rebound in car sales.

    I think the issue Farago and others (including myself) raise is that GM needs to undergo a thorough restructuring in North America, with new and enlightened leadership, in order to be truly competitive here. While there’s no doubt that GM has made strides in the right direction, there are simply too many brands/models to feed which dilute any true recovery. Until this structural problem is addressed, it’s just good money after bad.

  • avatar
    Mekira

    If they let this stupid bailout go through, let’s join together and make sure nobody buys any vehicle badged with a Ford, Chrysler, or GM logo—-which will allow us to bail ourselves out of anymore bailouts they want to throw at us. We’ll NEVER be able to pay this off, along with our other inflated debt. Remember the headlines from yesterday? Dow Jones at lowest point since 9/11. Why dig America into an even deeper hole?

  • avatar

    So we’d rather own our airlines, Fannie Mae, Freddie Mac, AIG and all of Iraq instead of GM?

  • avatar
    John Horner

    “What the hell business does the federal government have owning 80% of an insurance company.’

    And what business did an insurance company having investing in the most speculative kinds of derivative funny money paper? Oh, right, all of the restrictions on what insurance and other kinds of financial companies can do pretty much got blown out of the water by Phil Gramm & his gang. You know Phil Gramm, right? The long time top economic adviser to McCain?

    The Republican deregulation dogma has given us a shrinking middle class, the highest take for the wealthy few in history and the socialization of the massive financial risks which made it all happen. We still have yet to see the final explosion of the highly leveraged buyout companies (Bain Capital, Cerberus, etc.) which have been buying up companies, laying off US workers, outsourcing as much as possible to Asian while at the same time loading the acquired companies with debt for the purpose of paying the buyers outrageous “special dividends” and “advisory fees” in the hundreds of millions of dollars. The truth is that many US factories have been closed down not to “enhance competitiveness”, but in order to fund multi-hundred million dollar quick money payouts to the modern day robber barons. In many ways the last 30 years of US economic activity has much in common with the way Russia’s oligarchs have behaved over that same period of time.

    But hey, lets all get riled up about gay marriage instead of seeing what has really been going on.

  • avatar

    Close, but no cigar.

    Luscious has got a good handle on the problem here. Pch101 sees the local implications of the AIG implosion, but refuses to see the monetary effect.

    No – no one is actually “printing” any money, particularly not when you’re dealing with such amounts.
    The last time a huge stash of actual money (in the billions) was up for grabs was in Iraq. They flew it in, on pallets, using huge transport planes, and then stole it all. The international luxury trade called what ensued “The Baghdad Effect” – there was so much cash suddenly available.

    What’s happened this time is worse. The US Gov’t is bailing furiously to keep a leaky vessel from sinking, and when you’re in that state you don’t care what it takes, or how much you have to pay for some extra pumps.
    The cost of having AIG topple now is devastation, and a probable loss for McCain in the coming election — which is why one keeps the vessel afloat a bit longer.

    Yes, Pch101, money is being made out of thin air, which means that the money already around is worth less, in direct relation to the stuff being printed. And while it really is an electronic entry, it still is added to the total, and tallied by those who keep tabs on the total amount quoted against a currency. That total influences investment decisions, ratings and balance-of-trade.

    The amount of actual cash available represents about 3% of the amount of currency quoted — if you want to make a run on your bank now you’re free to do so. It’s been like that ever since the gold standard was lifted in order to make this kind of investment mania possible.
    But cash is worthless – if we ever stop thinking it’s tied to real value. And that’s what’s happened with the housing crisis and the sub-prime crisis, and the prime-crisis. That’s why U.S. expatriates are finding it difficult to live in Paris, London, Berlin and elsewhere these days, they’re really hurting – after lording it for years with a strong dollar that reflected a budget surplus.

    Those huge write-offs that companies are going through now (not just the 2.8) actually mean something. The amounts represented value that’s gone poof. And that’s why the dollar has been sinking over the years – fluctuations in the price of oil are giving it a boost now, but when you stop to think why the price of oil is going down, it’s time to worry again – it means the economy really is tanking. (Sorry, bad pun.)

    AIG helped insure those piles of imaginary value. Once the brokers and banks were through creating their fantasy total value packages, and the rating companies were through pretending they were worth that much, that value was insured – and AIG, as the world’s biggest insurer, did some of that insuring.
    Now that the value is gone, pixie-dust dollars, the insurance company has had to pay up, but the money with which to do that is gone, and therefore AIG is really bankrupt, they’re just pretending they’re not.

    Which leads a rabidly reactionary White House to socialize AIG. If the consequences weren’t so dire, it would all be hugely entertaining – a real life Trading Places.

    No matter what form of bail-out GM is offered, outright socialization or money in the bucket, it’s going to be expensive money. AIG is “paying” 11% for the money it got — get used to that number, you’ll be seeing it a lot.

    There is irony here, of course, just as the AIG grew big charging premiums to insure lousy loan packages, the gov’t is now charging AIG a premium to have it bail the leaky vessel it helped create.

  • avatar
    mel23

    lets all get riled up about gay marriage instead of seeing what has really been going on.

    This is a democratic republic and will survive only as long as an informed public governs themselves wisely. We’ve long been running on momentum of earlier generations. Are we Rome? Yes. Our manufacturing base has been stripped out and replaced by financial legerdemain. Now that’s collapsing.

    I think the $25B bailout has become mandatory, but GM will burn through their slice very quicly. The credit crunch is forcing oil speculators to deleverage so oil should continue to fall. This will help GM some but not enough.

  • avatar
    ronin

    It is not GM’s turn yet. First a few more insurance companies need to be bailed out. Then Stimulus package II to only some Americans. Then the FDIC has to be bailed out. Then Stimulus III to some Americans. Then more FDIC bailouts. THEN it is the turn of the automakers for a bailout. Then it will be the airlines’ turn. Then the oil companies for free bailout money. Then, name your own idiotically managed company, which by very virtue of its poor management deserves to have money taken from taxpayers under threat of force, and given, by unelected Fed Reserve governors, to companies flunking business 101.

    Money will go from broke gov to broke company, and taxpayers will be more broke. Big companies as welfare queens.

  • avatar

    TriShield :

    So we’d rather own our airlines, Fannie Mae, Freddie Mac, AIG and all of Iraq instead of GM?

    False option set. I’d rather not own ANY of them.

  • avatar
    shaker

    I’m going to paint this with a large, sloppy brush:

    The push of private industry towards 410(k) retirement plans and the federal government’s complicity (by altering the tax code to encourage such “investment”) has given the private sector a huge pool of money to swim and play in.

    And just like children with no sense of the future, they’ve splashed all of the money out of the pool, and are now crying for Mommy to fill the pool again so they can keep playing.

    All of this because corporations wish to bear no future responsibility for their employees by properly investing in an employee pension plan — why? Because it will limit immediate profitability, and possibly lower the value for shareholders.

    There actually is class warfare out there, and the high class is now collecting more (corporate) welfare than ever.

  • avatar
    07Frontier

    I’m not an economist, but I thought the United States was democratic, not socialist. And if these companies default on these loans, what will that do to the deficit and the debt?

  • avatar
    Qwerty

    The Big 2.5 are now farked. GM and Ford will stil be around–maybe even Chrysler will survive. But they will all be much much smaller than they are now.

    The world financial system is caving in on itself. It will be restructured into something new and much more regulated. The end result will be that Americans will be forced to live much closer to their means. When the full effects become apparent to Joe Sixpack, auto sales will crater–even more so than they already have. The losses in Detroit will be huge. Even if they get their $50B, it will be quickly sucked down the rathole.

  • avatar

    Ignorance is a lovely thing. The AIG loan was basically to cover the fact they didn’t have cash on hand, their fundamental capital structure is pretty solid and they can sell off a division or two and pay back the loan easily. The government is only buying them if they default.

    The Big 2.8 are a money hole that will never see a return, and frankly will not change anything anyway. Any government loan would have to be preconditioned on a complete elimination of every single executive and renegotiation of every dealer contract just to start making a real dent.

    GM could go down and it would suck for its employees and ripple a bit. If AIG went down, especially for a short-term cash flow issue, we would be in the next Great Depression.

  • avatar
    netrun

    @ Stein X Leikanger :

    The value destruction following the devaluation of bad mortgage lending practices is only partly to blame for the dropping value of the dollar. The biggest driver is the amount of debt the US gov’t is pushing on the rest of the world to buy. There are fewer buyers now so the price drops.

    And the AIG loan is primarily a good idea so that AIG can untangle all of it’s accounts from the global economy and unwind it’s positions nice and slow. This keeps the destruction to a minimum and as sections of AIG are detached they will be sold off to pay back sections of the loan. The bet the FED made is that the value of these AIG groups together will be more than $85B.

    If GM, Ford, or Chrysler were interested in this kind of a loan arrangement I would remove my opposition to loaning them money.

  • avatar
    Pch101

    Luscious has got a good handle on the problem here.

    Actually, he didn’t. He confused AIG’s dilution of its shareholder value with the Fed printing money. Two different concepts.

    Yes, Pch101, money is being made out of thin air, which means that the money already around is worth less, in direct relation to the stuff being printed. And while it really is an electronic entry, it still is added to the total, and tallied by those who keep tabs on the total amount quoted against a currency.

    Sort of. For one, the money multiplier existed before this, and will continue to exist after this. Most of the money in our systems doesn’t exist in physical form — they are accounting entries that are created through debt, by using our banking systems.

    There is nothing unique about the conceptual aspects of what is being done here. What is unique here are the reasons for doing it, and the extent to which it is being done.

    Governments routinely pump money in and take it out of the economy, depending upon circumstances. Over time, you can expect that this money will be pulled back out of the system, just as it was infused. They have a track record of doing both, so it is misleading to suggest that this money will be added into the system, only to be kept there permanently.

    But cash is worthless – if we ever stop thinking it’s tied to real value.

    I always respond to these “no fiat money” statements in the same way — please send me your worthless cash. Since there’s nothing to it, you shouldn’t miss it, although I will certainly appreciate it.

  • avatar
    Pch101

    The push of private industry towards 401(k) retirement plans and the federal government’s complicity (by altering the tax code to encourage such “investment”) has given the private sector a huge pool of money to swim and play in.

    The big picture problem is that our governments are highly motivated to have economic growth, because growth creates prosperity, and prosperity makes businesses successful, makes voters happy and generates taxes for government.

    Most of that growth comes from consumer spending. The level of spending to which we have become accustomed isn’t possible without credit.

    To increase credit required a lowering of standards — not just subprime, but at all levels. This included just about everything, from getting rid of the 20% down payment requirement for home purchases to lowering the minimum monthly payment on credit cards.

    Our governments hoped that the banking system could just insure around the problem. Instead of simply banning these questionable loans from existing in the first place, they instead allowed private industry to work around it by allegedly ranking the risk (ratings) and insuring based upon those risks.

    This concept is inherently flawed. This would be akin to trying to solve the drunk driving problem by requiring drunk drivers to get better insurance policies, instead of just keeping them from driving in the first place. Except in this case, the government actually wants there to be drunk drivers in the system (people with too much credit), they just hope that they don’t have accidents. Which of course, makes no sense at all.

    AIG’s failure shows us that you cannot possibly insure against a systemwide collapse. Insurance is fine on a one-off basis, but insurers can’t handle mass implosions that all happen at once. We should have known better, but since our governments want economic growth and our companies want to make more money, you can expect that another version of this will happen again, probably in another 15-20 years time.

  • avatar
    Morea

    If the Federal government is already in debt and is being sustained by foreign capital, does this mean that the Chinese and the Middle Eastern Gulf states are the real owners of Fannie, Freddie, AIG, etc.?

    Also, what kind of proof is there that, say, an AIG failure will create a worldwide depression? (economic models perhaps? how reliable are they since so much is emotion?) This is bandied about but I have yet to see a cogent analysis of its veracity.

    Claiming ‘crisis’ is always a sure way to gain money/power.

  • avatar
    mel23

    The first news of the AIG bailout I saw was announced by Bloomberg as a NYT headline. This was about 9 pm or so. So I start watching the USD. It’s falling a few basis points every 5 minutes or so. So I check again about 1 am and somehow this trend has reversed and it’s back up. A little more intervention perhaps? This obvious move along with the holding steady of interest rates says they’re worried about inflation. They’ve caught a hell of a break with oil going down.

    I saw an interview last night of a former employee at the FED. He was shaking his head at the AIG bailout. He said their insurance obligations had to be separate so that couldn’t be the cause; unless the state etc. insurance regulators had not been doing their job. This point is supported by New York’s offer to free up the $15B or so provided AIG got the rest of the money they needed. So he felt the reason for the bailout was in AIG headquarters and their CDS etc. As he said, these deals were between consenting adults and should have been forced to unwind.

    Meanwhile individuals are going down in flames and losing everything every damn day with what help? They were irresponsible? In most cases yes, but these companies were in every case, and the execs float away on their parachutes.

  • avatar

    @Pch101
    But cash is worthless – if we ever stop thinking it’s tied to real value.

    I always respond to these “no fiat money” statements in the same way — please send me your worthless cash. Since there’s nothing to it, you shouldn’t miss it, although I will certainly appreciate it.

    Hey – the sentence may be unclear. But it really is a system of trust now, where we have to KEEP thinking the money is tied to real value, and can be transacted for such. If we STOP thinking that, as evidence mounts it may not be, then cash becomes worthless.

    Example: As more MacMansions are turned into animal shelters – http://newsfeedresearcher.com/data/articles_e37/ide2008.09.07.04.29.23.html – the value of such properties is no longer able to meet the expected valuation.

    Our dear car “majors” see something similar happening to the value of the unsold cars on their lots. Etc, etc, etc.

    It’s one heck of a ride!

  • avatar
    Orian

    What concerns me the most about these three bailouts in the last hand full of days is that the government is seizing control of large financial institutions. While it appears to be a good thing, it seems more of a consolidation of government and business into one entity. Add in the freedoms lost to the Patriot Act and things are sort of looking scary. *adjusts tin foil hat conspiracy theory now*

  • avatar
    Pch101

    But it really is a system of trust now, where we have to KEEP thinking the money is tied to real value, and can be transacted for such. If we STOP thinking that, as evidence mounts it may not be, then cash becomes worthless.

    Anything becomes worthless if everybody decides to not want it anymore.

    If you want to be a hardcore survivalist, then store up food, water, guns and ammunition, because the only currency that functions in a completely broken system is the one that feeds yous, clothes you and kills for you.

    The system could not function with a gold standard. Whenever I read internet rants advocating, I just have to shake my head.

    When we had a gold standard, depressions and economic wipeouts were regular events. Most of the people reading this would have lived through a couple of these and would have a much lower standard of living had we stayed with it.

    Without a gold standard, it is much easier to manage through the dips. Just so long as the Fed doesn’t model itself after the German treasury of the early twenties, we will be fine. No matter who is president, you can bet that this isn’t going to happen. But we do need to put some brakes on the credit system, and figure out a way to live on less growth, which means buying less stuff.

  • avatar

    Of course it couldn’t function with a gold standard – but we are relying on a system of trust, and it’s clear that a number of the people making major asset management decisions aren’t worthy of trust …

    Your last sentence touches ground solidly. We do need to rein in the credit system, and impose a reality check on growth expectations — whether we plan it, or just have it happen on its own, is another matter! :-)

  • avatar
    NickR

    John Horner, I couldn’t agree with you more.

    However, I don’t want to venture too far down the path of discussing politics, so I keep it at that.

    But I do have to pose a question…why, in the long term, are we better off bailing out AIG rather than letting them go bust and having it’s pieces picked up by other organizations or creating a new one? I know it would be a shock to the system, but so are a lot of things that have happened and will happen.

  • avatar
    Pch101

    why, in the long term, are we better off bailing out AIG rather than letting them go bust and having it’s pieces picked up by other organizations or creating a new one?

    Here’s the cycle:

    -Investors bought investments based upon their ratings and the insurance provided by companies like AIG. These investors require adequate insurance to continue to own their investments.

    -Because AIG’s rating dropped, AIG is required to have more cash and assets on hand to make up for its rating decline.

    -If AIG couldn’t do that, these investors would need to replace that insurance. The only problem: at this moment, they won’t be able to get that insurance anywhere else, either.

    -If the securities aren’t insured, in many cases, the investors can’t continue to own them. So they will sell them.

    -If all the institutions start dumping securities at once, their prices will go into free fall. These institutions themselves would be severely impacted, which moves through the entire economy.

    In the worst case and not unrealistic scenario, this could cause a depression. With so many assets on the market at one time, with no takers, the market for these assets gets wiped out. Those institutions start to fail, and it feeds a downward spiral that affects not just those investors, but the health of the system in general. Panic, in turn, causes companies to shut down or retract, people lose jobs, unemployed people stop paying their mortgages, and on and on and on.

    We can’t afford this. The feds have replaced the CEO, and their goal is to allow for an orderly sale of assets at reasonable prices. AIG will be a smaller company when this is over, as it probably should be.

    The risk is that there may not be a market for selling these assets. But if the world treasuries can maintain some degree of stability, there should be enough of a market to repay the loan.

  • avatar
    NickR

    Pch101, thanks for the explanation. Makes sense now.

  • avatar
    ronin

    >>”-If all the institutions start dumping securities at once, their prices will go into free fall. These institutions themselves would be severely impacted, which moves through the entire economy.”

    So what if the prices go into free fall- ie, attain their true value? Where in the constitution does it say it’s the job of the federal gov to prop up prices, to keep them artificially high? Or try to…

    We can pretend all we want- and Paulson could proclaim how sound things are all he wants. But the very fact that the gov, when all is good, takes this action proves ipso facto that all is not good. Else this unprecedented action would not have been taken.

    This is not to prop up prices, since it will fail. It is to prop up prices as long as possible until the big boys can sell off. then it will be allowed to collapse.

    Because if all that was necesary for stock prices to remain high was for the government to take control of pieces of the market mechanism, all citizens of the previous big govs that have tried this- such as the Soviet Union- would be infinitely rich forever.

  • avatar
    Pch101

    Where in the constitution does it say it’s the job of the federal gov to prop up prices

    The Constitution doesn’t require that you have a job or a meal, but you’re probably glad to have both.

    It is to prop up prices as long as possible until the big boys can sell off. then it will be allowed to collapse.

    Not at all. You’re basically arguing that they want to buy assets today that would immediately decline in value after they’ve bought them, which isn’t true and makes no sense at all.

    Let’s clarify — this is not about supporting the **stock** price. The shareholders of these companies that have been “bailed out” have all gotten creamed. Nobody cares about them or their fate.

    This is being done to protect the value of the private investments that these parties hold in their portfolios that are insured by companies like AIG. Those don’t trade on the NYSE.

  • avatar
    geeber

    pch101: But we do need to put some brakes on the credit system, and figure out a way to live on less growth, which means buying less stuff.

    I’m not disagreeing with you, but won’t this take down at least one domestic automobile company, and really damage some of the foreign ones, as well?

    It seems as though the domestics – particularly GM – have been providing financing to anyone-with-a-pulse to move stock.

    Meanwhile, several of the foreign luxury marques have been using lease deals or special financing to get “strivers” into their near-luxury models. I keep seeing all of these BMW 3-Series and 5-Series and Mercedes C-Classes and E-Classes at my health club, at the grocery store, etc., and can’t believe that there are THAT many people with incomes sufficient to buy these vehicles. I don’t live in an especially rich area…

    And given that many people have been getting mortgages with no money down, any tightening of credit standards will take more people out of the housing market, which will further depress prices. Which will also reduce the number of people who can use home-equity loans to buy vehicles, vacations, etc. Again, I look at the prices of a Suburban, Tahoe, Sequoia, Expedition and wonder how all of these people can afford them.

    For the auto industry, I see this as getting MUCH worse before it gets better…

  • avatar
    mel23

    Pch101:

    What you say is true in large part, but the situation has come to this point because the big boys wanted to take care of the big boys regardless of the OBVIOUS risk to the society as a whole. And now today, after the AIG action, it’s the credibility of the US Fed and Treasury as a whole that’s coming into question. The cost of insuring against a default by the US has risen dramatically. We’re considered to be less safe than Australia; not as bad as Russia yet. Silver is up 11% today, gold up over 9%, but ‘somehow’ the USD is down barely at all. I have to believe the Mid East and asian holders of the USD are pulling it out in huge quantities, and the USD is being supported by our govt. This can’t go on, and if/when it fails, the failure of AIG would be a blip in comparison. It’s like the mess in Iraq; it’s a near impossible problem now but could have been easily prevented earlier.

  • avatar
    CarShark

    I heard that the reason that all these brokers and AIG went into Death Spiral Mode was because they killed the “uptick rule” for stocks. How much truth is there to that?

    I like the idea of deregulation…so long as the remaining regulation works.

  • avatar
    Pch101

    the situation has come to this point because the big boys wanted to take care of the big boys regardless of the OBVIOUS risk to the society as a whole.

    That’s partly true. But the core motivation is to prop up US gross domestic product, which means getting consumers to spend, spend, spend.

    The government isn’t going to bother telling you this, but they have a lot invested in getting the average Joe and Jane to spend a lot of money, as that is what keeps the system propped up. They were enablers and beneficiaries of the boom that led to this crisis.

    They can all wring their hands and blame “irresponsible” homeowners (read: minorities), but they ultimately wanted there to be a system that created loans that had a high risk of default. Any situation that allows people to buy a house
    with almost nothing down is begging for default, no matter how high of a FICO score that the borrower has.

    I’m not disagreeing with you, but won’t this take down at least one domestic automobile company, and really damage some of the foreign ones, as well?

    Sure. With the credit crunch, car loans will be harder to get, and leasing is bound to be curtailed as residuals take a hit and become unpredictable.

    Toyota and Honda will be fine, as they have brands that are strong enough to attract the buyers who are left. Consumers are bound to become more risk adverse when times are tough, which means that the strongest brands will get stronger over the long run.

    The domestics will have problems; they had them before, and now they’ll be worse. We’ll see what happens, but I expect that GM may end up being sold, with the present shareholders getting a tiny fraction of the current stock value. (Sorry, Buickman.)

  • avatar
    mel23

    I think the easy money for the common consumer eventually became a feedstock byproduct of the financial game of the derivative and collateralization game. Thousands of foolish people were eager to sign on for a mortgage deal they couldn’t support and go nuts on credit cards they couldn’t support which became raw meat for the financial magicians to mix with a ton of hamburger helper of their hugely leveraged ‘instruments’ and walk away with billions. Now we have the residue. The game was set up to end up just where it’s going. All kinds of offshore orphan corporations established with the sole purpose of isolating the perpetrators from responsibility and claw back when it went down. This stuff went on and was certainly not a secret to anybody in the business or with a legislative or regulatory role. I guess there’s no point in getting excited about it; it’s just the way we do things.

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