Economics

Bailouts Are Back!

|

Did anyone really think they had gone away? The feds are diving back into Wall Street to save AIG, the insurer infamous for its fraudulent practices. Here's the National Post:

In a scramble to avert what would have been the biggest casualty of the credit crisis to date, the U.S. government last night agreed to sweep in and bail out global insurance giant American International Group (AIG).

The dramatic U-turn puts AIG in the government's control in exchange for an emergency loan after the group at the heart of the financial system failed in a drive to raise about US$85-billion from a private consortium, according to people familiar with the deal….

Hank Paulson, the U.S. Treasury Secretary, had steadfastly rejected the idea of a government bailout for Manhattan-based AIG, the largest insurer in the world, with US$1-trillion in assets. He and other federal officials had been pushing AIG and Wall Street banks to come up with a private-sector solution for the billions in emergency financing.

But those attempts came up dry after two days of searching for funds.

Which isn't to say the average AIG shareholder is sitting pretty:

American International Group Inc. lost 44 percent of its remaining value in early trading after investors learned that the U.S. rescue will curb the insurer's dividends and wipe out most of their stake….

The "punitive" interest rate on the two-year loan "makes it extremely clear that this is not a subsidy extended to keep the company afloat but rather a stranglehold that makes AIG unviable while ensuring that its obligations will be met," said Marco Annunziata, an analyst at UniCredit SpA, in a note to clients. "This is to all extents and purposes a controlled bankruptcy."

A better word might be nationalization.

NEXT: If There Was a Problem, Yo, I'd Solve It

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Socialism for the rich.

  2. More FED money for failed corporation, time to buy gold.

  3. “This is to all extents and purposes a controlled bankruptcy.”

    Can anyone who is in the know (which isn’t me) chime in on whether this is complete bullshit?

  4. I’m just wondering whether this is the September revamp they told us about in July.

  5. I think this is an outgrowth of more and more peopel getting into the market. We have an ownership society today. Most people are invested into the stock market either through a 401K or a pension fund. The ownership society is sold as a way to get people to embrace the market and oppose government control of the market. I think the opposite is going to prove true. As more and more people are dependent on the market doing well, the political pressure to ensure that no one loses in the market will be greater and greater.

    Why is the fed doing this and neither side of the political isle saying anything? One reason I think is that both parties are terrified of the prospect of pension funds going belley up and leaving millions of voters without their retirement. People get to vote with their dollars but they also get to vote with their votes in elections. To think that millions of people will blythy accept the ups and downs of the market and not demand that their politicians step in and do something seems to be pretty naive.

  6. The left is too entranced by romantic idealization of nationalization and the right is laughing all the way to the bank with our tax-money.

    Suck it, two-party system.

  7. Can anyone who is in the know (which isn’t me) chime in on whether this is complete bullshit?

    Its bullshit. Controlled bankruptcies are Chapter 11 bankruptcies. This is a leveraged buyout by the federal government. Leveraged buyouts are to bankruptcies like leasing a car is to making an insurance claim on a car.

  8. “A better word might be nationalization.”

    Yes, it would be. Libertarianism marches on! The state will wither away! Vote Bob Barr!

  9. I don’t like to say I told ya so (OK, I do like to) from 2 days ago

    Check out the first link in
    GG | September 15, 2008, 5:22pm.
    My prediction immediately follows.

    How do you like co-signing a big ass loan for your loser brother in law?

  10. Wow. That new temperance the Fed discovered with Lehman lasted all of two fucking seconds.

    A new record. For longevity.

  11. We have an ownership society today.

    This has certainly taken on an ironic twist, no?

  12. “This has certainly taken on an ironic twist, no?”

    Basically we have put the retirements of millions of people in the hands of the big bankers and hedgefund creeps. It is not surprising that when they inevitably fuck it up, they will hold the pensions hostage in return for a bailout. I am not saying there is a better sollution, but those are the facts.

  13. What have organizations in critical industries learned? Take any risk! Be crazy! The Feds will save your ass! Woo hoo!

  14. Stiglitz: The globalization agenda has been closely linked with the market fundamentalists — the ideology of free markets and financial liberalization. In this crisis, we see the most market-oriented institutions in the most market-oriented economy failing and running to the government for help. Everyone in the world will say now that this is the end of market fundamentalism.

    In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism — it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn’t work. This moment is a marker that the claims of financial market liberalization were bogus.

    The hypocrisy between the way the U.S. Treasury, the IMF and the World Bank handled the Asian crisis of 1997 and the way this is being handled has heightened this intellectual reaction. The Asians now say, “Wait a minute, you told us to imitate you in the U.S. You are the model. Had we followed your example we would be in the same mess. You may be able to afford it. We can’t”.

    John McCain
    Lehman Brothers
    Barack Obama
    Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. I spoke with him Tuesday about the Wall Street meltdown. Nathan Gardels: Barack Obama has said the Wall Street meltdown is the grea…
    Joseph Stiglitz was awarded the Nobel Prize for Economics in 2001. I spoke with him Tuesday about the Wall Street meltdown. Nathan Gardels: Barack Obama has said the Wall Street meltdown is the grea…

  15. Oh, but we are told that we need to have a progressive income tax and that we must have a trillion dollar military and that we need a regulatory stranglehold on private, consensual trade as without these we would be troglodytes.

  16. Hey affenkopf:

    A few months ago in one of these threads,
    I posted my thoughts upon buying a $20 gold piece
    on a whim, back in 2001.

    I was immediately hammered as a paleocon ‘gold bug’.
    The hostility was amazing.

    We must be on the right track, unfortunately.
    Good luck!

  17. We have nationalized things in the past. That is really what we did in the S&L bailout back in the 90s. The government took over the failing S&Ls, liquidated the assets, closed them down, make good to the depositors and threw the crooks responsible in jail.

    Which kind of nationalization is this going to be? Will it be that kind or will it be the Labor Brittian kind where the government comes in and just props up bad and innefficient businesses. If it is the first kind and the leadership of these companies and institutional investors suffer a lot of pain and the government gets out of quickly, this isn’t so bad. If it is the second kind, this sucks.

  18. This isn’t a controlled bankruptcy, but it does look like the loan is intended to give AIG time to sell off some of its assets, without having a fire sale.

    I believe that AIG owns American General, a sizable finance company. I wonder if that is part of the problem?

  19. I’m surprised by how economically illiterate Reason readers are. I thought Reason had real economists on the payroll. Yes, it is a nationalization. But no, nationalization is not always the worst possible option.

    You don’t have to take my word for it. The Economist magazine was advocating the nationalization of Fannie and Freddie back in July. Contrast this with the way Britain handled Northern Rock. Has anyone here been paying attention to the chaos in the financial markets over the past year? No less an authority than Alan Greenspan called this a once in a century event. Almost everyone who knows what they are talking about agrees that this is a market failure of Great Depression proportions.

    The comments here fret about what this means for libertarianism. I count myself a libertarian, but I’m sure that if I were in Bernanke’s or Paulson’s position, I would be thinking practically and trying to prevent a financial catastrophe by any means necessary; and I believe that is exactly what the Fed and Treasury are doing.

    This isn’t socialism for the rich as one idiot here commented. Go home, crack open an economics or history textbook, and post something intelligent.

  20. Belay my last. We didn’t just co-sign a loan, we bought our brother in law’s business that he drove into the ground.

    I should have at least scanned the post rather than misinterpring the headline.

    *hangs head in shame*

  21. Fuck AIG. Fuck Treasury. These AIG bastards rejected a private leveraged buyout (from J.C. Flowers & Co) in favor of a gov’t one so the board could save their jobs/bonuses. Not to mention those same snakes sold out Greenberg when Spitzer came rattling sabres at them for some ridiculous charges. Shame on Paulson and Bernake for subsidizing these sorry bastards. If Treasury has this much money to throw into the financial industry,then they have too much money laying around. Where’s my damn rebate?

    The worst part? We are all now sponsors of Man U.

  22. We’ve been running a junkie economy since the 2001 Farm Bill. Every time the economy feels bad, the gubment shoots up some more. We’ve been shooting up more and more just to feel less and less bad. I’d like to think we’re hitting our bottom, but it’s an election year and both candidate are prescribing more heroine. At the very best, we still have to go through withdrawal. But I don’t see that happening anytime soon.

    doom
    Dooom
    DOOOOM

  23. How much will we taxpayers have to pay for Ford Motor?

  24. My money has been safely converted to Zimbabwean currency. It looks like a sure thing to me.

  25. The point is that Bernanke and Paulson should not be in this position to begin with. If you believe in truly free markets, then you should believe that when people make lousy decisions, they should fail. This is how free markets correct themselves. The measures being taken now will not avert catastrophe, merely delay it.

    Once again the American taxpayer must foot the bill for fat, rich bastards idiot choices.

  26. I heard a few psychologists suggest that we first learn to laugh when something scary proves to be benign. When the scary hands in the front of the face is revealed to the comforting face of you mother, the dissonance of realization causes a giggle to form. Or when we are thrown up into the air and experience the frightening sensation of falling, only to be caught safely in the arms of your father.

    If we want these companies to stop making stupid decisions, maybe it’s time to let them all fall instead of just giving them the giggles. They are been caught so many times they no longer carry about teetering along the edge of the roof.

  27. Its the same Republican plan as always: socialism for big business and social darwinism for the rest…

  28. I heard on the radio this morning a quote from an Obama speech to the effect that this proves the hands-off, free market economic philosophy doesn’t work.

    Yeah.

    Cause that’s what we’ve had. An unregulated free market economy.

  29. Lets look at the track record: After the Carter Administration: a small national debt/deficit, after the REAGAN Adminstration: A MASSIVE debt/deficit, After the Bush I Administration: An increasing National Debt/Defecit, after the Clinton Administration: a balanced budget and massive surplus and again back to a Republican Administration: A Massive debt/deficit…Since when are Republicans fiscal conservatives?

  30. Suck it, two-party system.

    Sugarless, I think you’ve got it backwards. I do believe that was the two-party system telling *us* to suck it.

    And like it, too.

  31. We have nationalized things in the past. That is really what we did in the S&L bailout back in the 90s. The government took over the failing S&Ls, liquidated the assets, closed them down, make good to the depositors and threw the crooks responsible in jail.

    And we have a winner!

    The is not about maintaining the orderliness of the market, which is perfectly orderly if you leave it alone. This is about saving the skins of a few thousand pampered white men who know very well that if justice is served the only career prospects they’ll enjoy in the next several years is as cell-block whores.

    I don’t just mean the bankers who fear any number of indictments for fraud. Paulson is understandably afraid that the first act of an Obama administration will be to throw the book at Bush’s cronies, including himself. I sincerely hope that’s the case.

  32. Socialism for the rich.

    And I’m feelin’ poorer every day.

  33. James,

    Clinton Administration: a balanced budget and massive surplus

    Never happened. We havent run a surplus in any year since the 50s.

    Clinton had a PROJECTED surplus, but we never had one. Or a balanced budget.

    And, of course, thats using bogo-accounting, not GAAP accounting. Using GAAP, the numbers would have been freakin’ scary.

    In other words, James, you are either a sucker or an idiot. I will leave the call to you.

  34. Little quibble with the Post article; AIG had buyers interested. They just chose to refuse the offers because they figured that the government would bail them out if they let things go, allowing the board to keep their plum jobs and vote themselves golden parachutes on their way out.

  35. When I see No less an authority than Alan Greenspan I stop reading.

    Sorry. Does that make me illiterate?

  36. While I share (almost) everyone’s discomfort with this buyout, I should point out that this is not ‘socialism for the rich’. I don’t know how many of us have retirement savings in AIG accounts, but I’m sure there are millions of middle class folks who do. Maybe it will teach us a lesson not to trust our money to one of the largest investment companies in the world, but if size and reputation are insufficient, I wonder what other indicators we might use.
    Just thinking out loud, and pretty sure I don’t have money in AIG at the moment.

  37. Check this out:

    AIG said late Tuesday it would not reduce capital at any of its subsidiaries or tap into Asian operations for liquidity.

    AIG’s life insurance, general insurance, and retirement services businesses, including its large Asian operations, continue to operate normally, remain adequately capitalized and are capable to meeting obligations to policyholders, the company explained.

    Awesome. Glad to see they won’t take use any of their own money for this. The US Gov’t is happy to bend over for them. Excellent work, gentlemen.

    Old Joke – A guy in Vegas is approached by a bum. The bum asks if him for $100. The man asks “How do I know you just won’t spend this at the tables?” The bum answers “Because I already got gamblin’ money!”

    We just got suckered, people.

  38. “Clinton had a PROJECTED surplus, but we never had one. Or a balanced budget.

    And, of course, thats using bogo-accounting, not GAAP accounting. Using GAAP, the numbers would have been freakin’ scary.”

    True enough, but my point still remains, Democratic adminstrations have been far more proficient at governance. 5 of the 8 years of the Bush Adminstration have been the top 5 budget deficits in U.S. History. And yes, that is without accounting for the Iraq/Afganistan conflict or subtracting the addition of the social security surplus…

  39. I should point out that this is not ‘socialism for the rich’.

    The company’s customers are not the ones being bailed out. Rather, the federal government is propping up the jobs of AIG executives (i.e. “socialism for the rich”) instead of letting them fail like every other (non-Fortune 500) business in the country.

  40. James,

    Democratic adminstrations have been far more proficient at governance.

    Ummm…this is a libertarian site. Being better than republicans gains you zero credit. I dont grade politicians on a curve. An F is an F even if the rest of the class is an F-.

    Answer honestly, how would a libertarian administration with a libertarian majority congress done on budgetary issues? Yeah, thats what I thought.

    Of course, budgeting is constitutionally entirely within the realm of congress (other than an easily overrid veto), so judging administrations by budgets seems insanely stupid.

  41. if size and reputation are insufficient, I wonder what other indicators we might use.

    Competence?

  42. I don’t know how many of us have retirement savings in AIG accounts

    On another issue, this doesnt matter at all. If you own stocks within those accounts, you would still own them after AIG crashed and burned. If you had cash, they are FDICerly protected (or protected by private insurance), I believe, so unless you had huge cash positions, you would be okay. Other than owning AIG stock/bonds itself, I dont see how having your account with them would matter, other than you would have to transfer your assets to another company.

  43. If you had cash, they are FDICerly protected (or protected by private insurance), I believe

    Money market funds are not FDIC protected. I suspect most cash people hold in brokerage accounts are in money market funds.

  44. squarooticus,

    Good point about money markets. Hence my, or private insurance, comment. I know the cash in my investment account is protected up to $10 million. Not that I need that protection, but I like that it exists. I assume AIG has a similar policy in place.

  45. Check out the thread on Dealbreaker about this. The profanity is brilliant and inspiring.

    http://dealbreaker.com/2008/09/fed-may-offer-bridge-loan-to-a.php

  46. Hey, P Brooks, whether or not you agree with Alan Greenspan, you must agree he’s qualified to judge the severity of this crisis. You shouldn’t of stopped reading; you should have started thinking. I’m tempted to answer your question, but I’ll let you be the judge.

  47. My illiterate opinion is that Alan “Git ‘cher free money here!” Greenspan should be dangling from a lamppost in front of the Federal Reserve Bank in DC. He *somehow* went from the guy who was supposed to take the punchbowl away, to the guy pouring Everclear into it.

  48. Economic illiterate:

    One who thinks that nationalizing any industry or company is good.

  49. If one has retirement money in AIG and AIG fails, one loses his retirement money. If the federal government bails out AIG or nationalizes it, one may retain his retirement money-at the taxpayers’ expense. If that is not socialism, what is?

  50. Thinking practically means you acknowledge that socialism sucks and does not work.

  51. Can anyone who is in the know (which isn’t me) chime in on whether this is complete bullshit?

    It’s not bullshit. The Fed is trying to keep joe sixpack’s accounts from being frozen. In order to do that they have to have time to sell AIG assets properly rather than a way-below-market fire-sale prices. The crap that’s worth 5% of stated value will sell for 5% of stated value, the Fed is just trying to keep from selling the properly-stated-value assets from selling at 5% of stated value.

    In some sense AIG probably has more joe twelvepack accounts than joe sixpack, but joe breweryowner is going to have pay a shitload of interest on the time he’s buying. AIG has enough performing assets that the taxpayer probably won’t be holding the bag.

  52. NO, NO, NOOOOO! This is great. Let the guv’ment nationalize ALL business, issue each citizen common stock, and then we can have some really hilarious stockholder meetings….er, um.

    Pro Libertate
    I believe that AIG owns American General, a sizable finance company. I wonder if that is part of the problem?

    From what I know of American General, they mostly deal in small, piss-ant “payday” types of loans. I could be wrong, though.

  53. If the federal government bails out AIG or nationalizes it, one may retain his retirement money-at the taxpayers’ expense.

    But that’s not what is happening. AIG is being forced to sell performing assets (they have plenty) to cover losses stemming from non-performing assets. The Fed is selling AIG time (at very high interest) so they can realize near-market prices on those assets rather than bankruptcy-sale prices.

    It’s much closer to Putin-style nationalization, except that Putin has/had every intent to keep the company running whereas the Fed seems to be looking to sell off AIG in pieces over two years.

  54. Is it time for Bush to get back on the privatizing Social Security bandwagon?

  55. from a historical standpoint it’s hard to object to the government’s mass bailouts since similar debt-producing methods were put into action to save the U.S. from the Depression; maybe we’re all socialists at heart and don’t want to admit it…

  56. In a scramble to avert what would have been the biggest casualty of the credit crisis to date, the U.S. government last night agreed to sweep in and bail out global insurance giant American International Group.

Please to post comments

Comments are closed.