This is, to put it nicely, complete and utter bullshit:
In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations
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 could be exchanged for an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.
A person briefed on the matter said the agreement does not require shareholder approval.
Shareholder approval? Shareholder approval‽ How about Congressional approval? Taxpayer approval?
Let’s put this in perspective. $85 billion is more than the entire annual discretionary budget for the Department of Health and Human Services — those lazy welfare cheats, don’t’cha know. It’s half again as large as the entire annual discretionary budget for the Department of Education. It’s more than twice the annual budget for the Department of Veterans Affairs, more than twice that of the Department of Homeland Security. It’s more than the combined annual discretionary budget of the Departments of Labor, Interior, Treasury, Transportation, Agriculture, and NASA combined.
And this is being done with no vote from Congress? We’re putting almost four times as much money as we receive annualy from estate and gift taxes on the line to nationalize AIG? And when AIG defaults, what then?
The bad actions of the rich and powerful have led us to this spot, my friends. And maybe the government has to act, but it shouldn’t be able to act by fiat.
But I never, never want to hear another goddamn “fiscal conservative” whining about helping a poor family who needs an extra $200 this month to make the rent. I never want to hear another word about providing for the health care needs of the people of this nation. I never want to hear another sound bite about how the poor are just lazy. Fuck that noise.
If We the People are going to be on the hook for the rich, I don’t want to hear another word about why we shouldn’t be on the hook for the poor. The rich people aren’t going to bed hungry tonight, and the smart folks in charge of AIG, Merrill, and Lehman are still sleeping in the same mansions they were last week. They’ll not miss a meal, nor a tee time. And yet tonight, it’s them who’s getting your hard-earned tax dollars, folks. It’s them for whom the Fed is going to the mat. And if that doesn’t enrage you, it should.
You and Michelle Malkin are singing the same song.
I’m opposed to the bailout, of course. But I’m opposed to most things. Whatever it is, I’m agin’ it.
Reading the comments at Malkin’s place on this one are like reading people who have just woken up from a 30-year coma.
Um, because your imaginary meritocracy is a tissue of lies and always has been?
Auguste – meritocracy or no, those people were in a situation where they could gain handsomely in the short-term without the possibility of personally suffering in the long-term, and so they did. Is it ‘screwing up’ if you finish ahead of the game anyway?
A couple of points.
1. Lots of fiscal conservatives are pissed about this.
2. We didn’t bail out Lehman they went under..and I thought BOA bought Merril.
btw, even if the fed didn’t bail out AIG, the people that run it would make out okay in the bankruptcy. I hope some better shareholder governance comes out of this. The bankruptcy code assumes that the shareholders are in charge and making money. Seems to me the managers are.
Well, in the case of hyper-inflation, I’d say there’s still the possibility of long-term personal suffering, but moreover, I’m really referring to the inherent belief in a large portion of conservative circles that success = moral worthiness.
Edit to add: And, as evidenced by our Malkin commenter friend, some of them even maintain a tenuous connection in their mind between “moral worthiness” and “effect on other than self”; which is why they’re genuinely surprised when their beloved greed doesn’t lift up society as a whole.
Market conservatives generally adopt the principles espoused by mainstream economists, one of which is that markets are efficient in the medium to long term, but can be inefficient in the short term, particularly where market participants are operating with limited information.
In an interconnected global economy, a failure of a major institution and its defaulting on its obligations can trigger a chain reaction of other failures. A major global economic collapse is obviously undesirable, and almost all mainstream political views agree that there should be a government backstop to prevent the collapse of the financial system.
The collateral for the AIG backstop is tremendous, and was valued very recently at far above the $85 billion it is posted against. AIG needed an immediate capital infusion to remain solvent, and AIG’s failure would have had far-reaching, destructive effects on the global economy.
Treasury has been very careful to avoid creating an atmosphere where companies will take risky actions in anticipation of government bailouts, by refusing to bail out investors in the companies who are given federal aid. Shareholders of Bear, Fannie, Freddie and AIG were all wiped out, and Lehman was denied assistance and permitted to fail.
I don’t see a wall-t0-wall bailout policy fueled by some “old boy network”.
I see very careful evaluation of where it’s essential to step in and prevent market collapse. Some very big houses have been denied bailout assistance.
I see government aid carefully structured to make sure the decision-makers and investors share the pain.
Most of all – I trace the causes back to back-door government meddling in markets. Fannie and Freddie got in the shape they did because government funding insulated them from the market.
This was compounded by Clinton-era populism that forced Fannie and Freddie to issue loans to people that were not good risks, in places that were not good investments. Loans that would not have been issued based on straight-up evaluation of the numbers.
That’s when we first heard “whining about helping a poor family who needs an extra $200 this month to make the rent. ”
From a populist Dem-controlled White House trying to score “social-justice” points with voters.
Poor people don’t give large donations to political campaigns. Poor people’s children don’t go to school in the same schools as the well-to-do. Poor people shop at different stores than the 1%’ers. Poor people form their world view using gossip, hate chain e-mails and the powers of deduction and thought present in your average 9 year old. Not the best foundation for competing. Poor people don’t play the market. Poor people serve $100 dollar meals, they don’t eat them. Poor people suffer and die in relative anonymity. Poor people can be replaced if the social safety net has a few tears in the mesh. Criminal poor people go to jail, they don’t remain free to lobby for or write laws making similar future criminality legal. Poor people do not launch wars, they die in them. Poor people serve the same function in society they’ve served since humans shed gills and grew legs. The biggest, smartest and, most importantly, first creature out of the water promptly set about eating any of the others trying to crawl out of the muck. Isn’t changing. Enjoy the muck.
Sadly, we will continue to hear the same crap from fiscal cons whe it applies to helping “regular folks”. They’ve created a Bizarro-World New Deal where government bails out a few fortunates out of the pockets of the many. Unlike what FDR accomplished, I don’t think we’ll be benefiting from the results 80 years on, though.
I truly sympathize with all the outrage here — especially since, as it happens, I used to work for AIG, and it is run by the worst collection of cutthroats, backstabbers and thieves in overpriced suits (“$6000, and it’s not even leatha!”) you can possibly imagine.
But, if that global economic collapse everyone keeps mentioning were to happen, yes, the fat cats would suffer, but the poor would suffer far worse, as is always the case. Millions of people would have no place to sleep, nothing to eat, nowhere to go. There would be bread lines and soup kitchens and riots and depth of poverty not seen in this country in my lifetime. To say nothing of other countries, where hordes of people are already worse off than the average American can fathom.
Add me to the list of people not at all happy about this. I think that capitalists who take risks should have to bear the consequences of that risk.
However, as Robert points out, you are comparing apples and oranges. When you give someone $200 for rent assistance, that money is gone. The taxpayers are never going to see it again. That doesn’t mean that you shouldn’t do it. But it means that it’s entirely different from a purchase, which is what this transaction with AIG is. That money that went to AIG purchased 80% of the company. The government can and will turn around and sell that, and get money for the taxpayers out of the sale.
I’m not in a position to know whether the taxpayer is likely to take a loss, break even, or make a profit on the sale. From what Robert says, I think it’s likely we’ll at least break even. But if this is a good deal, I have to ask why this transaction couldn’t be completed using private parties.
How do people who get so far in life screw up so royally?
Because the consequences of their actions for them are not commensurate to the consequences of their actions for other people. For some reason these guys get large payouts regardless of the actual performance of the companies the work for. Why corporate boards of directors sign contracts for CEO’s that have terms such as this is beyond me. It seems like they are defrauding the shareholders, and it should be investigated.
I see government aid carefully structured to make sure the decision-makers and investors share the pain.
Frankly, Ben, when someone earns tens of millions of dollars while their company dives into the muck by lending people money that those people can’t pay back and gets millions more when they get fired, I don’t count that as “sharing in the pain”.
“To work in a high-level position of any of these financial companies, chances are you have to have an Ivy League or near-Ivy League degree.”
Yes and No. Wall Street has become more of a meritocracy, especially with the rise of quant trading (which values mathematical skills and has alot to do with the current crises) and the hegemony of the ivy-league has opened up the street to ethnic minorities, but there’s been a long tradtion, somewhat dwindilng, of executives with no college degree and working class backgrounds as well.
of recent ceo’s, komansky of merrill, cayne and ace greenburg of bear stearns, had no college degrees. and if we go back a little, lewis ranieri of the old salomon bros was a high school dropout. bear stearns and salomon were known for their cultures which did not value university degrees, though they are both gone now.
“How do people who get so far in life screw up so royally?”
its the market. you’re predicitng human behaviour, which can be irrational and unpredictable due to a high degree of free will. for example, an expert in sports may still find it hard to predict who’ll win the world series. How many historian predicted the collapse of communism, to use another example.
If i could suggest some background reading: “when genius failed” about the collapse of long term capital management, the giant hedge fund “bailed out” by the fed about a decade ago. they literally hired nobel prize winners and mit mathematical geniuses.
this is the beginning of the current crises. the rise of the quant hedge fund mangers who viewed the world very rationally, and their financial models could not account for extreme irrationality. also, as a subtext, you see the changing ethnic face of wall street, the decline of wasp hegemony and the exceter-yale crew, and the rise of eductional meritocracy, a sort of revenge of the nerds we also see in IT and VC culture.
Or, if you can catch it, check out NOVA’s “the million dollar bet.” I guarantee you it’ll make this seemingly boring and esoteric topic fascinating.
Dorn said:
They’ve created a Bizarro-World New Deal where government bails out a few fortunates out of the pockets of the many
Dorn, you need to re-evaluate who’s getting bailed out here. Lu is correct in who exactly gets hurt. Also, consider that corporations like Lehmann Brothers and AIG are in fact not owned by a few capitalist fat cats. Anyone who’s got a 401K or a pension plan probably owns a piece of these corporations or corporations like them. That reaches way down the economic ladder to the majority of people in this country. Lots of people get hurt directly if these companies go under. Lots more get hurt when a lack of confidence in the market means that nobody can get their hands on reasonably priced capital – employers don’t spend capital they can’t afford to finance, and therefore there’s no money to buy what your company makes, and therefore you lose your job.
Hm. I thought you folks would be interested in this. As you know, the biggest problem we’ve had so far is that the housing market was inflated because Fannie Mae was loaning money to people who couldn’t afford to pay it back. In 2005 a bill, S.190, was introduced in the Senate to fix the regulation of Fannie Mae. This was in response to the fact that a Federal office had issued a report saying that Fannie Mae’s earnings were misstated. Here’s what one of the co-sponsors of the bill said (BTW, in this context “Mr. President” refers to that day’s presiding officer of the Senate, not President Bush):
This was the second time that a bill of this nature had been proposed in Congress. The opponents claimed:
Guess who the sponsors of the legislation who correctly predicted that Fannie Mae’s financials were overstated and would lead to collapse? Guess who didn’t believe it and fought the measure and blocked it in committee? Well, the speaker in the first blockquote above was Sen. McCain. The speakers in the second block quote were Represenatives Barney Frank and Melvin Watt, both Democrats. Gee, I wonder how well poorer families will do in the current financial climate in getting housing loans?
BTW, the same bill was resubmitted in 2007 as S.1100 and has been sitting in (the Democratically controlled) committee since 4/12/2007.
No, the root causes of the current debacle is deregulation.
The subprime mortgage crisis was spurred by shady, loose transactions involving no down payment loans, variable rate mortgages that began with negative interest rates, and no credit checks. These were offered to people who the lenders knew couldn’t afford it in the long run, but the money they stood to lose was dwarfed by the continued revenue they could expect from peddling these deals onto other people – not to mention equally shady derivative instruments and mortgage-backed securities that insured that the lenders themselves wouldn’t face the full brunt of their own follies. (Liabilities for real estate debts was chopped up and mixed with other, less threatening ones and dispersed into the market, essentially erasing the blow from any one default. Of course, if everyone starts defaulting at once… ) So it was a mixture of a classic market bubble with a deregulation-enabled abdication of individual culpability in the lender market.
Perhaps it’s true that whatever your station, the people signing on these deals mortgages shouldn’t have made them anyway. But such irrationality has always been with us; back during more sensible times, it didn’t cause a financial collapse for the rest of us because such questionable dealings were frankly against the law. The Republicans did away with common sense restrictions on the stock market the past couple of decades, and we are now reaping what they’ve sowed. Rest assured, the blind ideologues in Washington and in right wing think tanks that has forced this onto the rest of us will get through their days are well shielded from all this.
The correct way to provide a leg up in housing for the poor is through standard FHA-backed mortgages and by putting Fannie Mae back in the public trust. (It wasn’t privatized until the 70’s, when its troubles began.) But such measures were politically impossible in the Washington environment of the 80’s and 90’s.
RonF, if you want to play that game, liberal economists like Baker and Kuttner have been predicting a housing collapse since at least the start of the first Bush administration. Conservative economists and publications, by contrast, have played economic Pollyanna for most of the past eight years. Democrats and Republicans, of course, are poor stand-ins for actual liberals and conservatives, I realize.
Ron F. You have to remember that when companies like Lehmann Bros. get “saved” the shareholders still get shafted. Yes, they’re supposed to be owners, but in bankruptcy the companies are uniformly allowed to get away without paying anything back to the stockholders who took the actual risk.
“The subprime mortgage crisis was spurred by shady, loose transactions involving no down payment loans, variable rate mortgages that began with negative interest rates, and no credit checks.”
As far as I know, there were always credit checks…which were done instantaneously, revolutionizing the old system where customers would go to the bank in person, which was more subjective. They often did not check income, however, as their financial models indicated this was not a high risk among a large group of people.
“These were offered to people who the lenders knew couldn’t afford it in the long run, but the money they stood to lose was dwarfed by the continued revenue they could expect from peddling these deals onto other people”
This would mean the lenders were more financially saavy than the ibankers and hedge fund managers who bought the deals. Doesn’t really add up. As far as I can tell, not many of these securities made their way to retail investors (in great contrast to say the internet scam at the end of the clinton years) though I’m sure some Merril customers got stuck with them.
The interesting thing here is that it was the ibankers and professional money managers that got left holding the bag (well, besides the taxpayers). Say what you will about James Canye, Bears CEO, and there’s not much good to say, but he did have his entire net worth tied up with the firm, and more or less went down with the ship.
This means it was avery different scandal than Enron, for example, whose CEO and CFO famously sold off their stock, knowing it was a house of cards.
Slyphhead, play what game? I’m not talking about making projections about the housing market. I’m talking about taking specific actions to increase regulation (with concomitant investigation) into Fannie Mae that were co-sponsored by Sen. McCain but that were blocked by the Democrats. The rationale given by the Democrats at the time was an accusation that it was an attempt by Republicans to limit access to housing loans for poor people. Right now that looks more like a knee-jerk “If the Republicans like it it must be bad” political game than a judgement of what was best for the public and the economy. If the Democrats had supported increased regulation of Fannie Mae back then we’d probably be in better shape now.
Elena, if a company like Lehmann Brothers is allowed to go bankrupt then you’re quite right; the shareholders lose their investments. I know, I worked for a company that went bankrupt and I learned more than I ever wanted to about what happens in bankruptcy. But when the government intervenes before the company goes into bankruptcy, then what happens varies depending on what the government does.
Manju, try to use the blockquoting tags when quoting someone – it’s sometimes hard to tell who’s saying what with just quotation marks.
I’ve heard and read of many accounts of mortgages being offered to known bad credit risks, when any cursory examination would have denied them the loan. But if all we can trade on this are anecdotes, then we can stop here.
The whole point behind these new mortgage backed securities is that the risk pool is spread over an incredibly wide area. Investment firms that take them on were not taking bad risk off creditors’ hands – they were helping to defuse them. Or they thought. The only unsavviness required is a faith that the bubble won’t burst, which was held by lenders, borrowers, and financiers alike.
Well, one of two. The other is the loose, unregulated environment required for such shenanigans to flourish.
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