Esoteric Dissertations from a One-Track Mind

September 17, 2008

The Credit Crisis: AIG Bailout

Filed under: economy — Tags: , — codesmithy @ 6:17 am

In yet another twist in the Credit Crisis, the Fed stepped in to give AIG a $85 billion loan.  AIG, and the other insurance companies like AIG that guaranteed the mortgage backed securities (through “credit default swaps”) are basically where the buck stops in the credit crisis.  Well, not exactly, if the insurance companies go bankrupt, then the mortgage backed securities would have to be reevaluated because they obviously aren’t going to be AAA any longer, which in turn would cause massive write-downs and losses.  It is a fear of the second scenario that made the Fed act.  Another reason the Fed had to act was because no one else would.  AIG’s obligations on these mortgage backed securities are so odious, only the government, an institution that can raise funds through coercion, could make such a poor investment.  Therefore, I find the following highly dubious.

Fed staffers said that they expected A.I.G. would repay the loan before it comes due in two years, either through the sales of assets or through operations.

The $85 billion is what is needed continue a delusion, i.e. that by chopping and slicing a bundle of bad debt, you wind up with something that just isn’t repackaged bad debt.  Well, it isn’t anymore, because now the American tax-payer is footing the bill, but AIG’s ability to repay the loan is predicated on re-couping some of that debt through selling the underlying asset, like the house (good luck with that), selling other assets and firing employees.

This isn’t to say the Fed didn’t do the right thing.  If this is the approach the Fed takes, guaranteeing AAA rated securities with taxpayer money, then it needs to be regulated.  The second issue is anti-trust.  There should be no entity on Wall Street that is “too big to fail.”  Third, people who perpetrated this fraud need to be sent to prison and some of their property confiscated in order to repay American tax-payers.  The end result of the credit crises cannot be a financial system that continues with “business-as-usual” after getting bailed out by American tax-payers.  It is morally indefensible to have a system that privatizes profits and socializes losses.  The effects of this crisis are going to linger for years to come, so we are faced with a choice: the people can either demand something better or let the moment pass.

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