

Fed takes over AIG - furiouslol
http://dealbook.blogs.nytimes.com/2008/09/16/federal-reserve-may-act-alone-in-rescuing-aig/

======
aston
"The Federal Reserve plans to offer an $85 billion bridge loan to the American
International Group in return for control of the ailing insurance giant..."

Nice redefinition of AIG.

~~~
mtw
$85billion!!!

where do the Reserve get the money? do they print it? gold reserves? next
year's taxes? asia?

~~~
gills
they get it FROM YOU.

~~~
bart111
true. Through printing press though. This is additional 85bln usd in
circulation. We will all pay at the gas pump and groceries. Socialism for the
rich. Communistic China would not do that. It is sad to see the USA becoming
parody of this what it used to represent.

~~~
netcan
Why is this _for the rich_? I've seen that remark thrown around several times
& I don't understand it.

From what I understand, this sort of a move is basically done by inflating the
dollar causing anyone who has savings to lose out (the people without savings
only lose if their wages don't catch up).

~~~
nuclear_eclipse
Because only the rich, the people who own/control these mega-corps, are the
only ones receiving gigantic funding "bailouts" from the government, meaning
they don't face the fallout of their stupid mistakes. It's basically a free
ticket to steal money from the American public, but only if you can afford to
set up a mega-corp and let it fail while you "earn" multi-million dollar
salaries every year regardless of performance...

~~~
netcan
Are the people who own _mega-corps_ richer then those that own regular corps?
Generally speaking, stock is not owned exclusively by the super rich. The
lower end of the spectrum (those that also have no savings) do not own stock.
Anyway, haven't they lost most of their money already?

On top of that this isn't for the shareholders. It's to keep a financial
system from collapsing. You can argue that it wouldn't have collapsed. That
this makes it more likely to collapse etc. Sure.

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ckinnan
I want a bridge loan for my startup. Instead, I get to pay taxes to pay for
this nonsense.

~~~
Angostura
If AIG went down, do you in some way think you would find it easier to get a
loan. On the contrary, I think it would be unlikely that anyone would be
lending anyone anything.

~~~
bsaunder
I'd prefer to see the government take even half the amount of money and offer
lots of smaller grants/loans to innovative entrepreneurs to launch our country
into the next wave of growth. That's where the new jobs and economic growth
will be. Give it to people creating value.

~~~
kingkongrevenge
Do you have any idea how many such programs already exist? They all end up
funding catfish farming research programs in Robert Byrd's territory. You seem
a bit naive of the real function of cheap/free government money.

------
krschultz
So if big companies can't fail what prevents them from taking a risk that ends
up this way in the future? Small companies have the advantage of being able to
risk it all, big companies have the advantage of large sums of capital. To
upset that balance is to increase the barrier of entry for small players.

~~~
kqr2
Yes, all these bailouts create what is known as a "moral hazard"

<http://en.wikipedia.org/wiki/Moral_hazard>

~~~
tdavis
Precisely. Nobody should get bailed, the economy should collapse for a little
while and eventually get itself sorted out. The moral should be, "an economy
cannot run on practically free credit alone."

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jmatt
What harm is there in letting a company that made bad decisions go bankrupt? I
don't see how it's pragmatic to pass this burden on to tax payers and the
general public. I admit that I am idealistic about such things. I don't see
how government is going to solve any of these problems. The government will
lessen the pain but that same behavior will also slow any rebound and future
growth.

It seems naive and narrow minded to think another company won't step in if
there is a continued need for the services that AIG provide{d|s}. This new
company is likely to make better decisions. First, because they saw AIG fail.
Second, because they didn't fail and thus were stable enough to exist while
other giant financial companies failed.

~~~
dpapathanasiou
_It seems naive and narrow minded to think another company won't step in if
there is a continued need for the services that AIG provide{d|s}._

But it's unrealistic to think that the vacuum could be filled fast enough to
prevent a wave of failures among AIG's clients (banks who bought credit
insurance to get around regulatory limits).

There's more detail here:
[http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09...](http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/how_banks_depend_on_aig.html)

~~~
netcan
So is this a reasonable system for insuring against the collapse of insurers
(and the world's financial infrastructure)? Government rescues?

How about limiting the size of companies that are not allowed to die for
damage control? Or limiting their ability to become companies not allowed to
die?

~~~
nradov
It's not the absolute size that's a problem but rather the degree of leverage.
If you've borrowed $30 for every $1 in capital (like Bear Sterns did) and your
assets all drop by about 3% then you immediately become insolvent. They
thought they could prevent that from happening through clever hedging and
diversification but it didn't work. A possible solution might be to set hard
legal limits on size versus leverage for financial companies. But in practice
I'm not sure how practical it would be to write regulations to enforce that.

~~~
netcan
How many companies are in existence that are too big, too important or too
interconnected to go under? Can't really be that many.

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sethg
Somewhere, the ghost of Karl Marx is saying "WTF? They're nationalizing an
_insurance company_?"

~~~
eru
Karl Marx did not tend to write that clearly. Add some dialectic materialism.

Have you ever read the guy? It's awful.

------
fallentimes
Serious question that is actually very related: if you had to move to a
foreign country and work on your internet start up, where would you move? Why?

~~~
helveticaman
Chile, because it is a capitalist country. Costs are similar to India, but the
weather is Californian and taxes are really low. Still, though, SV is a better
choice. Don't move to Chile to start up.

~~~
Raphael
I was under the impression that Chile is socialist.

~~~
huherto
No, it is not.

Chile had a socialist president 40 years ago. He was overthrown by a military
coup in Sep 11, 1973 (note the date)

Now days, Chile is one of South America's most stable and prosperous nations.

~~~
razzmataz
They have a left-leaning woman for a president, though.

~~~
helveticaman
This is true. However, this does not mean the country has a lot more laissez-
faire than any other in the Americas. I don't know why this is the case, but I
know that it is the case.

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rsheridan6
If these companies are too big to fail, and we have to bail them out to avoid
returning to the Stone Age or whatever, how about some for the people who
created this situation? Maybe it's not ok to let the system collapse to punish
a few people, but "heads I win, tails the taxpayer loses" is also
unacceptable.

~~~
tortilla
They should allow these companies to fail. The world would not of ended. If
there's a need (market), new companies would have sprouted up. Stronger,
better, and more transparent companies to fill the void.

Sweden had a major banking disaster. Their government allowed them to fail.
Their banking system is solid now.

~~~
natrius
"If there's a need (market), new companies would have sprouted up."

You aren't even addressing the given reasoning for the bailouts. Meaningless
platitudes don't solve problems.

~~~
helveticaman
I don't think he/she has to address the reasoning for the bailouts, or that
he/she used meaningless platitudes. He/she even cited an example.

You don't have to address the other sides reasoning because it's hard to find
every flaw in an opponent's argument.

~~~
natrius
If you ignore the the actual reasons why the bailouts happened, how can you
argue against them? Sure, the bailouts preserved weak companies, which is a
bad thing, but you can't just ignore the benefits of the bailouts and say they
shouldn't have happened. That in no way resembles an argument, though
"meaningless platitudes" may have been an incorrect characterization.

"You don't have to address the other sides reasoning because it's hard to find
every flaw in an opponent's argument."

But the other side has put out a public statement explaining their actions.
This isn't about predicting how someone is going to make their case. The case
has already been made. At the very least, you have to address their
justifications.

~~~
helveticaman
What about the example of Swedish banks that failed and were not bailed out?
Surely that serves as a counter-example.

~~~
natrius
The goal of the bailouts is to minimize the effects of bank failures on the
economy, not to make sure the banking system is sound in the future. The
counterexample isn't valid. A valid counterexample would involve a country
avoiding a recession while not bailing out failing banks, but even then, I
don't think this particular situation has a historical precedent similar
enough to be pertinent.

Also, after actually looking into the example, it looks like Sweden _did_ bail
out the banks to end the crisis: "The government rescued the banking system by
issuing a general guarantee of bank obligations. The total direct cost to the
taxpayer of the salvage has been estimated at around 2 per cent of GDP."
(<http://ideas.repec.org/a/oup/oxford/v15y1999i3p80-97.html>)

Even with a valid counterexample, I think you should still have to explain why
the current course of action is wrong, not just why another would be right,
which is why I didn't address it in the first place.

------
furiouslol
Here are more complete articles:

[http://www.nytimes.com/2008/09/17/business/17insure.html?_r=...](http://www.nytimes.com/2008/09/17/business/17insure.html?_r=2&hp&oref=slogin&oref=slogin)

<http://online.wsj.com/article/SB122156561931242905.html>

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Alaric
I think some questions have to be asked about how risks are mitigated since
AIG appears to have a 400bln$ portfolio of CDSs and looks to have been hours
from the brink of potentially passing that risk back down through the system.
The counterparties of AIG's CDS must be mightily relieved.

------
rrf
Whilst excessive risk taking is probably the root cause of the recent
financial collapses, I think it’s also worth noting the role hedge funds have
played in stirring up investor panic by short selling highly geared or
mortgage exposed companies around the world. Britain’s largest mortgage
lender, HBOS, had 30% wiped off its value yesterday, attributed to short
selling - <http://www.marketoracle.co.uk/Article6277.html>

~~~
eru
How can short selling wipe out value? If it helps find the right price faster,
isn't that a good thing?

~~~
lallysingh
What's the right price?

~~~
eru
Somewhat above the price Warren Buffet buys at.

And, what's value? A change in market price of stocks does not imply a change
in the underlying compant. (For a very technical meaning of 'imply'.)

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indiejade
This news reminds me of an interesting video I happened across last year. From
it, draw what conclusions you wish:

[http://video.google.com/googleplayer.swf?docid=-905047436258...](http://video.google.com/googleplayer.swf?docid=-9050474362583451279&hl=en&fs=true)

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yamil
Welcome to socialist states of America

~~~
sd
Obviously, it's impossible to determine the effect of any one action on the
economy -- but if this $85b prevents the markets from crashing, I'd argue its
money well "spent." U.S. market cap has already fallen $4t in the past year.
Do you really want to risk losing considerably more?

~~~
ojbyrne
That was the argument for Fanny and Freddie. Didn't seem to work, and I bet it
won't this time. WAMU is next.

~~~
lacker
You don't think the Fanny bailout "worked"? We don't have the luxury of seeing
what would have happened if we hadn't bailed them out.

To make the pro-bailout argument more clear, here is one reputable economist
predicting that if we had let the FMs default, the dollar would drop about 30%
and unemployment would double, in about a week.

[http://www.marginalrevolution.com/marginalrevolution/2008/09...](http://www.marginalrevolution.com/marginalrevolution/2008/09/could-
you-clari.html)

~~~
byrneseyeview
So it would be like a 19th-century panic/recession, without hard money. He's
omitting the part where, since we aren't subsidizing stupid decisions, stupid
decisions don't get made and the economy recovers very quickly.

~~~
lacker
If only subsidizing nothing was sufficient to prevent stupid decisions from
being made!

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thomasmallen
This is just the finance world's Tower of Babel of credit and cheap money
falling over, and will mostly affect rich bankers. I think that the everyday
economy will be the same but with fewer imports as the dollar weakens.

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furiouslol
I don't wish to make light of the situation but Paulson has moved the US
Treasury from nowhere to the top of the M&A league table in just 1 year,

------
wenbert
god! this will affect the economy here in the philippines -- an the rest of
asia. makes me sad :(

~~~
pageman
from Thomas Crouch, Thomas Crouch, deputy director general of ADB’s Southeast
Asia department:

<i>"The Philippines is less vulnerable. It’s in a stronger position to
withstand these events due to sensible and prudent fiscal response of the
government." </i>

<http://www.bworldonline.com/BW091708/content.php?id=004>

