[Baromaro]

A lot of those "billionaires" are your pension fund, mutual funds and the banks you keep your money in. Don't worry, the stockholders of Lehman & Bear and employees were wiped out so if you must you can still revel in some schadenfreude.

Absolutely, but I only get to revel in it for a short time, because my taxes will be used to bail the rich guys out.

You use the tired old defense "but it is your pension, your mutual fund, blah, blah blah". No one, no way, no how earns in any way a $20 million bonus. This is a rich boy's club protecting itself. That could give a rat's ass about "my" funds. They want there's. All the crying over on Wall Street is over how much money they aren't taking home, not the disintegration of other people's money.

Let's see what these disgraced CEO's take home after this. I'm sure they'll never have to work, worry about insurance for their family, or really care about the price of gas again.

The gap between the rich and everyone else is so great that I will gladly take my lumps financially to witness their total ruin.

But wait, George W. Bush and JohnMcCain say the economy is doing fine! It's healthy. It's fundamentally sound. Maybe I just have a perspective problem.

No.

What has happened is that George W. Bush and the Republicans have ended their term with an assault on the financial infrastructure of this country equal to, if not greater than, the attacks of September 11. I guess it is appropriate to be talking about THAT date during this election season.

Congratulations Republicans! This is what we get when you put "Country First".

[Cogebrego]

Prob a dumb question, im not a money guy, but what would an individual do, to avoid these types of problems in the future, or is it just caused by the companys and not the people?

[Liaptoono]

Today was the worst day for the Dow since Sept. 2001.

AIG looks like it might go in the tank.

My wife works for AIG.


Did I tell you we are expecting?

[farmarrl]

I am not going to pretend that I am any kind of expert in financial matters, cuz I'm not. But based in simple facts what happened to Lehman is disturbing.

A company that has been around for 158 years tanking is appaling, no, its an outrage. All that history disintegrated at the hands of the short sighted. For all the good Fuld did nothing was worth leading a company that survived 2 depressions into irreparable damage and dismemberment.

Simply put: freaking WOW!

[Ambassador]

I wonder how it would be if the "free market" was actually allowed to dictate what happens without government intervention. It won't affect folks with 401Ks or Stock, because we all actually own those stocks.

In a sense you are seeing it. Because the Govt refused to bail out Lehman, i is going under. The combined result of Lehman going down, and anxiety around ML means credit will continue to get tighter, consumer and corporate loans will become more expensive, the supply of money will fall, and joblessness will increase, labor supply will increase and wages will fall, as the economy slows down.

Look, in principle I agree with you regarding bailouts, it sucks that we are so unwilling to help struggling home owners, and lower-income groups, and so eager to assist the very corporations who decry the social programs that aide the downtrodden, but the fact is that the systematic impacts of bank failures do have significant downstream macro economic effects and no one benefits from them.

This is abourt saving millionaires amd billionaires. I say let them drown. As for all those folks that will likely be laid off? They can use their votes in the upcoming election to do something about it. Not just millionaires. Mailroom clerks, messengers, janitors, security personnel, thousands of lower paying employees perhaps on the brink of retirement, with retirement funds tied up in 401K's are basically crushed. The sad and outrageous aspect of all of this is that the CEO's and Executive suite Officers will be generously compensated (especially in the case of ML) while "Joe Sixpack" is sold out. It is outrageous but true.

Shareholder value my a$$.

[Kliopeion]

Anybody want a good scare?

Listen to the Charlie Rose segment from last night (Monday, 9.15.08):

A discussion about the crisis on Wall Street

NYU economics professor Nouriel Roubini takes a particularly negative
view of where we could be heading (considering the international economic
interconnections, his predicitons are fully plausible).

Roubini has a website: RGE (Roubini Global Economic) Monitor

***

More, from Business Week:

Blogs: Financial Doom and Gloom

Bank of America's deal to buy Merrill Lynch
and the collapse of Lehman Brothers
spark even more worry in the blogosphere

by Karyn McCormack
September 15, 2008

For investors watching the disaster on Wall Street unfold, Peter Cohan at BloggingStocks has a piece of advice: "If you need your money in the next 10 years, take it out of everything else and deposit it in sub-$100,000 accounts with profitable banks."

That might not be such a bad idea, especially if you believe doomsayers like Nouriel Roubini, the New York University professor of economics who predicted back in February that one or two major broker dealers would go bankrupt and now believes all of them will eventually disappear. "If Lehman (LEH) does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Sept. 15 (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch (MER) first but also in sequence Goldman Sachs (GS) and Morgan Stanley (MS) and possibly even those broker dealers that are part of a larger commercial bank, i.e. JPMorgan (JPM) and Citigroup (C))," Roubini wrote on Sept. 13 in his blog, Nouriel Roubini's Global EconoMonitor. "Then this run would lead to a massive systemic meltdown of the financial system."

"What we are facing now [is] the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs," Roubini explains. "But unlike banks they are not properly regulated and supervised, they don't have access to deposit insurance and don't have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed)."

Monitoring AIG

Roubini, who has been called "Dr. Doom," also states: "This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the U.S. is falling in a now severe consumer led recession."

Unlike with Bear Stearns, the Fed and government decided to let Lehman fail on Sept. 14 after deal talks collapsed. "In a strange way, Lehman Brothers is being punished for not being more reckless," wrote Barry Ritholtz at The Big Picture on Sept. 14.

Focus also turned to insurance giant American International Group (AIG), which reportedly asked the Fed for a $40 billion bridge loan amid the threat that credit agencies would downgrade its debt, which would trigger more than $13 billion in collateral calls from investors who bought protection from AIG through credit default swaps, according to Bloomberg.

Mike Shedlock at Mish's Global Economic Trend Analysis wrote: "I suspect the ratings agencies will be asked to not downgrade AIG. I also suspect the rating agencies will honor the request citing unfair stress or some other nonsense. The hope will be what it always is: to buy time."

More Banks on the Brink

Noting that currency traders are worried about AIG, Joseph Lazzaro at BloggingStocks wrote: "U.S. officials will be monitoring AIG, given the large role it plays in credit default swaps: the goal most likely will be to stabilize AIG to prevent CDS-related panic selling."

Peter Cohan at BloggingStocks takes a jab at John McCain's chief economic adviser Phil Gramm for the bill amendment that sparked the huge growth in the CDS market, which is 48 times bigger than the $1.3 trillion worth of subprime mortgages and a key reason for Lehman's demise. "Since nobody has ever had to deal with this volume of CDS unwindings, it is impossible to calculate how much they will cost," Cohan wrote.

Another bank that seems headed for demise is Washington Mutual (WM), with the shares now trading at a measly 2.22. "The alert have taken note that the failure of Washington Mutual, which looks increasingly likely, would consume the FDIC's reserves and, as in the savings and loan crisis, force the agency to go hat in hand to Congress for more money," wrote Yves Smith at Naked Capitalism on Sept. 15. "The concern is that uninsured depositors will flee weak banks, and in process, push more over the edge."

The CEO Pay Angle

In the chaos, with thousands of Lehman and Merrill employees at risk of losing their jobs, some CEOs will probably come out with hefty pay packages. Paul Kedrosky at Infectious Greed points to a New York Times story saying that with the Bank of America (BAC) deal, Merrill CEO John Thain's employment contract change of control clause will be triggered, giving him $25 million in total compensation when he leaves Merrill after 10 months on the job. "That's impressive enough, but it's doubly so when you consider he got packaged out of the NYSE with just shy of $20-million not quite a year ago," Kedrosky quips. "Apparently Thain has turned executive exits into a business model."

On the morning of Sept. 15, Ritholtz at The Big Picture reflected about the "terrible lessons" learned from the interventions of the Fed and Treasury Dept. in the bailout of Bear Stearns. He starts with, "You have to threaten to bring down the entire global financial system" and concludes that "The only thing that matters is the firm's balance sheet."

Taking a somewhat calmer approach, Kedrosky at Infectious Greed thinks the initial reaction to this major financial event is "more emotional than substantive." He writes: "Untangling the consequences of today's once-in-a-lifetime unraveling will only be seen over the coming weeks and months. We have insidiously complex and interconnected markets, and the old days of being able to readily detect all the co-moving parts are long gone."

McCormack is senior producer for BusinessWeek.com's Investing channel.

Copyright 2000-2008 by The McGraw-Hill Companies Inc.

[FuXA8nQM]

I watched Charlie Rose last night and was very impressed that all the analysts told the unvarnished truth, (apart from Lawrence Summers' mealy-mouthed defense of central economic planning and market intervention).

A must watch for anyone who wants to understand what we've been through and what we're facing.

9/15/08 Charlie Rose Episode A discussion about the crisis on Wall Street [video]

The transcript isn't up yet, but the most telling quote was something like, "Our economy is entirely based on debt." Pretty telling!


A good video on the concept of Money as Debt [47:07] for those who don't have a handle on fiat currency and fractional reserve banking.

[Blacksheepaalredy]

Hey, Hey-

The Federal Reserve just came up with $85billion for AIG. The American Taxpayers are now shoring up the company responsible for insuring all of this bad debt. My tax dollars are now bailing out all of those "experts" who professed how healthy the market was and who once cheered the "free market".

My cynicism is peaked out.

In this election season, we are going to hear about all of the millions of Americans uninsured. We are going to hear about rising tuition costs. We are going to hear about inability to provide proper care to veterans. We are going to hear about high costs of medicare and medicaid and the "looming" Social Security problems.

Yet, in the last two weeks, we've seen the government bail out Fannie, Freddie, and AIG.

Maybe one of our own experts can explain to me, why I shouldn't be pissed off over these developments? How much is this corporate welfare costing versus the social welfare rolls at their height?

This country is a sewer.

[EzequielTMann]

How Much Does Welfare Cost?

News Type: Other — Tue Jan 8, 2008 3:42 PM ESTBased on information I received from the Office of Management and Budget I have revised this post. The numbers changed by enough that I though it worth revising.

I have been involved in some discussion of late regarding fairness of our tax system, income distribution, and income redistribution. It seemed to me that there was a lot missing in these discussions. In particular, the facts! So I set out to plow through some government reports to get a handle on were the money comes from and where it goes. This has turned out to be quite a challenge, especially since I am not an accountant (although I think even some accountants would be baffled by some of this stuff).

As I progressed it became obvious to me that this is a project that will need to be broken down into pieces. I decided the first piece would be welfare related expenditures because that has been a popular topic in my conversations and political debates. With that introduction, here are some of the welfare figures. I hope to have more analysis soon, depending upon when one very nice young intern named Karl at the Office of Management and Budget gets back to me with some information. (Karl has since gotten back to me which is why this has been revised. Thank you Karl!)

According to The Budget for Fiscal Year 2008, Historical Tables, total outlays for Means Tested Entitlements in 2006 were $354.3 billion. This was 2.7% of GDP and
Includes Medicaid, food stamps, family support assistance (AFDC), supplemental security income (SSI), child nutrition programs, refundable portions of earned income tax credits (EITC and HITC) and child tax credit, welfare contingency fund, child care entitlement to States, temporary assistance to needy families, foster care and adoption assistance, State children’s health insurance and veterans pensions.(from Table 8.1, page 133)
The cost of these programs has increased from 0.8% of GDP in 1962 (before Medicaid) to 2.7% of GDP in 2006, or by 1.9% of GDP. If we exclude Medicaid, health care for children and veterans pensions it is 0.89 % of GDP, or $117 billion. (The numbers for the excluded items are found in Table 8.5, page 142). This represents approximately 7.5% of total non-Social Security receipts to the Federal Government. So, for every one of your tax dollars to the Federal Government, about 7.5 cents goes to these programs. I hate to use averages, but the average taxpayer had a tax rate of 12.45% in 2005 (the latest data available here), so if we multiply things out we see that about 0.93% of the average taxpayer’s income went to non-medical “welfare”. So, if you made $50,000 and paid $6,225.00 in Federal income tax, approximately $465.00 went to all of these programs x-healthcare and veterans pensions.
__________________________________________________ ____________

One quarter of the total cost of ALL entitlements in this country was just handed over to a private company (AIG) by the government.

Where are all the Free Market folks now?

[satthackacibe]

September 17, 2008

Money Market Fund Says Customers Could Lose Money

By DIANA B. HENRIQUES
In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account.

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.
This is only the second time in history that a money market fund has “broken the buck” — that is, reported a share’s value was less than a dollar.

This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.

The Investment Company Institute, the mutual fund industry’s trade group, issued a statement Tuesday assuring investors that “the fundamental structure of money market funds remains sound.” It noted, too, that in the only previous case of a fund breaking the buck, investors nevertheless were paid 96 cents on the dollar.

But the Reserve Fund’s announcement may shake investors’ confidence. Moreover, institutional markets that are already under severe stress could be further shaken if this giant fund, and others like it, are forced to sell some less-liquid holdings to meet redemption demands from nervous customers in coming weeks.

The Primary Fund allowed its share price to fall below a dollar “after reviewing the unprecedented market events of the past several days and their impact” on the fund, the company said in a statement.

Specifically, the fund’s management, which boasted as recently as July about its cautious approach to the current crisis, determined that its stake in debt securities issued by Lehman Brothers Holdings, with a face value of $785 million, was essentially worthless, given the investment bank’s filing for bankruptcy protection. As a result, the fund said, its per-share value fell to 97 cents a share.

The fund’s financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.

If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fund’s money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Fla.

The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.

The fund is part of the complex run by Bruce R. Bent, who invented the money market fund concept with Henry B. R. Brown in 1970.

Since their inception, money market funds increasingly have been seen by individual investors as a safe harbor in turbulent times. According to industry statistics, the assets of money funds have grown sharply since the credit crisis began to intensify last summer.

But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors’ shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.

Those facts would probably surprise most money fund investors, who have come to think of money funds as being “just like cash, just like a checking account,” a fund industry lawyer, Jay Baris, said.

Whenever money funds have run into trouble, they have been propped up by parent banks and investment managers that provided the necessary cash. The single exception was in 1994, when one small regional money fund reported a share price below a dollar, according to the Investment Company Institute.

The continuation of this informal bailout policy “is much discussed in the fund industry, because funds are so much bigger today,” said Barry P. Barbash, a fund industry lawyer with Wilkie Farr & Gallagher and a former senior mutual fund regulator at the Securities and Exchange Commission.

In the past, regulators tended to focus on banning money funds from buying inappropriate investments in the first place, he said. “But now,” he added, “we’re talking about instruments that were completely appropriate for a money fund when they were purchased. That’s what makes this so much harder.”

Not only are funds bigger, markets are more turbulent. Many mutual funds have found their portfolios battered by investments in commercial and investments banks that were long considered close to bedrock on Wall Street. Money funds, too, suddenly found that some of their blue chips were tarnishing.

But with individual mutual fund investors showing little sign of panic, most funds have simply ridden out the current turbulence.

Several industry analysts said on Tuesday, however, that the Reserve Fund’s action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses.

“We’re really in uncharted territory here,” said Peter Crane, the president of Crane Data, a fund industry newsletter.



http://www.nytimes.com/2008/09/17/bu...ss&oref=slogin

[Hankie]

September 17, 2008

Fed’s $85 Billion Loan Rescues Insurer

By EDMUND L. ANDREWS, MICHAEL J. de la MERCED and MARY WILLIAMS WALSH
This article was reported by Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh and written by Mr. Andrews.

WASHINGTON — Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan.

They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers intitially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars’ worth of risky securities that were once considered safe.

If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.

“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”

Financial markets, which on Monday had plunged over worries about A.I.G.’s possible collapse and the bankruptcy of Lehman Brothers, reacted with relief to the news of the bailout. In anticipation of a deal, stocks rose about 1 percent in the United States on Tuesday and were up about 2 percent in early trading in Asian markets Wednesday morning.

Still, the move will likely start an intense political debate during the presidential election campaign over who is to blame for the financial crisis that prompted the rescue.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. Paulson and Mr. Bernanke had not requested any new legislative authority for the bailout at Tuesday night’s meeting. “The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”

House Speaker Nancy Pelosi quickly criticized the rescue, calling the $85 billion a "staggering sum." Ms. Pelosi said the bailout was "just too enormous for the American people to guarantee." Her comments suggested that the Bush administration and the Fed would face sharp questioning in Congressional hearings. President Bush was briefed earlier in the afternoon.

A major concern is that the A.I.G. rescue won’t be the last. At Tuesday night’s meeting, lawmakers asked if there was any way of knowing if this would be the last major government intervention. Mr. Bernanke and Mr. Paulson said there was not, but that the economic situation would certainly get worse without this bailout.

The decision was a remarkable turnaround by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

The decision to rescue A.I.G. came on the same day that the Fed decided to leave its benchmark interest rate unchanged at 2 percent, turning aside hopes by many on Wall Street that the Fed would try to shore up confidence by cutting rates once again.

Fed and Treasury officials initially had turned a cold shoulder to A.I.G., when company executives pleaded on Sunday night for the Fed to provide a $40 billion bridge loan to stave off a crippling downgrade of its credit ratings as a result of tens of billions of dollars of losses related to insurance investments that have turned sour.

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money given both the general turmoil in credit markets and the specific fears of problems with A.I.G. The complexity of A.I.G.’s business, and the fact that it does business with thousands of companies around the globe, make its survival crucial at a time when there is stress throughout the financial system worldwide.

“It’s the interconnectedness and the fear of the unknown, meaning the impact of a failure,” said Roger Altman, a former Treasury official under President Bill Clinton. “But size is a factor, you can’t ignore that. The prospect of the world’s largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage — that’s why it’s scaring people so much.”

Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billionand, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out. The Fed was advised by Morgan Stanley, and A.I.G. by the Blackstone Group.

[Question, in one sentence they call it a LOAN; in the next they say the government will OWN 80 percent of the company. Then, it actually implies that "shareholders" will still have any say in this firm that we just bailed out. THIS IS INSANE!]

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.

Asked why Lehman was allowed to fail, but A.I.G. was not, a Fed staffer said the markets were more prepared for the failure of an investment bank. Robert B. Willumstad, who became A.I.G.’s chief executive in June, will be succeeded by Edward M. Liddy, the former chairman of the Allstate Corporation. Under the terms of his employment contract with A.I.G., Mr. Willumstad could receive nearly $8.7 million in severance pay if his removal is determined to be “without cause,” according to an analysis by James F. Reda and Associates. Mr. Willumstad also stands to receive roughly $4.1 million in retirement benefits.

[Parachutes are still platinum in failing firms]

A.I.G. is a sprawling empire built by Maurice R. Greenberg, who acquired hundreds of businesses all over the world until he was ousted amid an accounting scandal in 2005. Many of A.I.G.’s subsidiaries wrote insurance of various types. Others made home loans and leased aircraft. The diverse array of companies were more valuable under a single corporate parent like A.I.G., because their business cycles offset each other, giving A.I.G. a relatively smooth stream of revenue and income.

After Mr. Greenberg’s departure, A.I.G. restated its books over a five-year period and instituted conservative new accounting policies. But before the company could really rebuild itself, it became embroiled in the mortgage crisis. Some of its insurance companies ended up with mortgage-backed securities on their books, but the real trouble involved the insurance that its financial products unit offered investors for complex debt securities.

Its stock tumbled faster this year as first the debt securities lost value, and then the insurance contracts, called credit default swaps, came under a cloud.

The Fed’s extraordinary rescue of A.I.G. underscores how much fear remains about the destructive potential of the complex financial instruments, like credit default swaps, that brought A.I.G. to its knees.

The market for such instruments has exploded in recent years, but it is almost entirely unregulated. When A.I.G. began to teeter in the last few days, it became clear that if it defaulted on its commitments under the swaps, it could set off a devastating chain reaction through the financial system.

“We are witnessing a rather unique event in the history of the United States,” said Suresh Sundaresan, the Chase Manhattan Bank professor of economics and finance at Columbia University. He thought the near brush with catastrophe would bring about an acceleration of efforts within the Treasury and the Fed to put safety controls on the use of credit default swaps.

“They’re going to tighten the screws and say, ‘We want some safeguards on this market,’ ” he said of the Fed and the Treasury.

The swaps are not securities and are not regulated by the Securities and Exchange Commission. And while they perform the same function as an insurance policy, they are not insurance in the conventional sense, so insurance regulators do not monitor them either.

That situation set the stage for deep losses for all the countless investors and other entities that had entered into A.I.G.’s swap contracts. Of the $441 billion in credit default swaps that A.I.G. listed at midyear, more than three-quarters were held by European banks.

“Suddenly banks would be holding a lot of bondlike instruments that were no longer insured,” Mr. Sundaresan said. “They would have to mark them down. And when they marked them down, they would require more capital. And then they would have to go out and raise capital in these markets, which is very difficult.”

Mr. Sundaresan said that for a new market arrangement to succeed, it would have to create a clearinghouse to track swaps trading, and daily requirements to post collateral, so that a huge counterparty would not suddenly find itself having to come up with billions of dollars overnight, the way A.I.G. did.

Edmund L. Andrews reported from Washington. Michael J. de la Merced and Mary Williams Walsh reported from New York. David M. Herszenhorn contributed reporting from Washington.



http://www.nytimes.com/2008/09/17/bu...insure.html?hp

[peakyesno]

We still don't know the extent of this yet, but at least most of NYC's lehman brothers employees will still have a job, as well as AIG, and ML. Good for NYC tax income and good for spending, and no big surplus of empty office space in NYC will happen, at least for now.

[Mjxhnapi]

ITs funny how this Reagan policy of "telling the goverment to get the hell out of the way of bussines" (AKA deregulation) lead the country he led to become the very thing he swore to destroy....

Communists.

[radicalvolume]

A deeply conservative republican administration, nationalizing American businesses. We live in truly ironic times. Delicious.

[jeockammece]

Did you see the interest rate on that loan?

11%!!!!

It is not like they are being given a free ride.

The only other thing is to see how much the company actually can make. Is this a buyout, or a bailout? Buyout means that something was inherently wrong, bailout means get the water out long enough for them to make some headroom and do it themselves later.


Here's a bit of irony. What would happen if all of our bailouts were high interest? If these companies started owing the biggest in-debt nation in the modern era?

So long as those that are loaned the money DO have a solid revenue stream to pay the debt, it could be a way, outside of taxes, to help our own political revenue system.


Question though, I know that it was the changing of their bond rating to "Junk" that caused them to go from somewhere near $60 a share down to a low point of about $4 a sahre in LESS THAN A DAY, but what was the cause of the rating?

If this company was still making money, the panic from investors bailing should not be the death nell of a viable corporate entity.

We need some regulation to help control some of this. Instant action/reaction has never boded well in a financial situation, some sort of buffer? A trading circuit-breaker?

I don't know.

[KahiroSamo]

SEPTEMBER 17, 2008

Get Your Class War On

By THOMAS FRANK

Now comes the fall culture-war offensive, catching the Democrats by surprise as it always does and spreading panic and desperation among their ranks. As the depth of the Republican breakthrough becomes apparent to Democrats, they launch the same feeble counterattacks that failed them last time, prudishly correcting misleading GOP advertisements and crying for the recess monitor when the other side plays dirty.
And none of this works.


Things would go better for Democrats if they recognized the culture war for what it is: a debased form of class war, a false populism in which an "authentic" America rises up against its would-be masters, an effete bunch of arugula-eaters who say "Happy Holidays" instead of "Merry Christmas." But a visceral feeling of class conflict is what lies at the core of the whole thing: a righteous grievance against wrongful, pedantic rulers. It is so attractive emotionally that I often wish I could sign up for it myself.

Since the 1970s, and with only a few exceptions, the Democratic response to this endlessly recurring attack has been to regard it as something beneath contempt -- which only reinforces the persecution fantasies at the heart of the culture-war myth. Take GOP vice-presidential pick Sarah Palin, for example, the flag bearer for this year's fall offensive. Like every other culture warrior before her, Mrs. Palin presents herself as a person looked down on and sneered at by the high and the mighty, defined as the liberal elite. Look down on or sneer at Mrs. Palin and you have merely reinforced the story, offered an illustration of what the lady is talking about.

When Republicans cry class conflict, it only seems fair that they get class conflict in return. And at this particular economic juncture it is the Democrats, not the GOP, who have all the weapons. Now if only they can be persuaded to use them.

Consider the current economic catastrophe, which has been building for a year. Just as it has taken down Countrywide, Bear Stearns, Indymac, Freddie, Fannie, Lehman, Merrill and Lord knows who else in the weeks to come, it has also pulverized the reigning conservative shibboleths of the past 28 years.

There is simply no way to blame this disaster, as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives' beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself -- and us -- to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century.

By the way, this is the same system the Republicans would still apparently like to put in charge of Social Security. The same system that is minting millionaire CEOs, that is holding the line on wages, and that we will be bailing out for years.

On Monday, John McCain blamed the disaster on "greed by some based in Wall Street." It's a personal failing of some evil few, in other words, and presumably capitalism will start working again once we squeeze the self-interest out of it. In the weeks to come, maybe Sen. McCain will also take a bold stand against covetousness and sloth.

But the structural changes of the past 28 years that have made all this possible -- the waves of deregulation, the takeover of government itself by business interests -- these haven't made too much of an impression on him. In March Mr. McCain actually called for more deregulation in response to the crisis, and at the Republican convention two weeks ago an ebullient Mitt Romney promised that Mr. McCain would take "a weed-whacker to excessive regulation." Just for good measure, this former management consultant also called for yet another round of attacks on the unionized federal workforce, deploring its "tyrannosaurus appetite."

Some tyrannosaurus! Thanks to the party of Romney and McCain, federal work is today so financially unattractive to top talent that it might as well be charity work. It's one of the main reasons -- other than outright conquest by the industries they're supposed to be overseeing -- that our regulatory agencies can't seem to get out of bed in the morning.

There has scarcely been a better time to shove the arugula aside and talk about the realities of class. It is heartening to see that Barack Obama is beginning to do just that, but he must keep hammering at the point until everyone in America understands the choice that lies before us.




Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

http://online.wsj.com/article_email/...html#printMode

[Wsjltrhe]

Source: AP

WASHINGTON - The White House says the extraordinary federal takeover of American International Group was needed to prevent broader harm to the reeling economy. But officials there also are acknowledging that taxpayers may never get fully back paid on the deal.

In the most far-reaching intervention into the private sector ever for the Federal Reserve, the government stepped in Tuesday to rescue American International Group Incorporated with an $85 billion injection of taxpayer money. The government will get almost an 80 percent stake in the company.

White House spokeswoman Dana Perino said Wednesday that the harm to the taxpayer could be even higher if AIG were to fail.

She said taxpayers would be the first to be reimbursed for the bailout. But when asked whether taxpayers may not get paid back at all, she said "That is true."

Read more: http://news.yahoo.com/s/ap/20080917/ap_on_go_pr_wh/bush...

[masterso]

Interfaith Federal Credit Union Closes (12th credit union failure this year)
Source: National Credit Union Administration

September 17, 2008, Alexandria, Va. -- The National Credit Union Administration (NCUA) placed Interfaith Federal Credit Union of East Orange, New Jersey, into liquidation yesterday.

The NCUA Asset Management and Assistance Center will issue checks to individuals holding verified share accounts in the Interfaith Federal Credit Union within one week. Through the NCUA National Credit Union Share Insurance Fund, credit union members’ deposits are insured to at least $100,000 on regular accounts and $250,000 on certain retirement accounts.

NCUA made the decision to liquidate Interfaith Federal Credit Union and discontinue its operation after determining the credit union is insolvent and has no prospects of restoring viable operations. At the time of liquidation, the credit union served 370 members and had assets of approximately $388,000.

NCUA chartered Interfaith Federal Credit Union in1982 to serve members of the New Hope Baptist Church in East Orange, New Jersey. Interfaith Federal Credit Union is the10th federally insured credit union closure to take place in 2008.

The National Credit Union Administration is the independent federal agency that charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, operates the National Credit Union Share Insurance Fund, insuring the savings of nearly 89 million members in all federal credit unions and most state-chartered credit unions. NCUA operations are funded by credit unions, not tax dollars.


Read more: http://www.ncua.gov/news/press_releases/2008/MR08-0917....




That's 11 banks and 12 credit unions that have failed so far this year.

[vqIo7X2U]

After AIG rescue, Fed may find more at its door
Source: Reuters

WASHINGTON (Reuters) - In one $85 billion fell swoop, the U.S. Federal Reserve may have wiped out what credibility it won resisting Lehman Brothers' rescue plea and opened its door to countless other companies to come calling for cash.

By providing a massive loan to American International Group on Tuesday, just two days after refusing to use public funds to save Lehman Brothers from bankruptcy, the central bank also invited tough questions on how exactly it determined whether a company was too big to fail.

.....

"They pretended they were drawing a line in the sand with Lehman Brothers but now two days later they're doing another bailout," said Nouriel Roubini, a professor at New York University's Stern School of Business.

"We're essentially continuing a system where profits are privatized and...losses socialized," Roubini said, adding that auto makers, airlines and other struggling businesses would no doubt be asking for government help too.

But Roubini said instead of handing out money to firms that made bad bets -- which could inadvertently encourage more risky behavior if companies think they have a safety net -- the government should be buying up mortgages and rewriting the terms so that households are not buried in debt.

Read more: http://www.reuters.com/article/newsOne/idUSN16442358200...

[sensation]

A deeply conservative republican administration, nationalizing American businesses. We live in truly ironic times. Delicious.

The label 'conservative' has been rendered meaningless for some time now.

This is 'statist' 'corporatist' nationalization in the Mussolinian 'fascist' mode.


A good piece by William Grigg.


Ninjahedge, regarding AIG, this can be seen as a kind of gangsterism (banksterism) by the Federal Reserve.

The analog would be a guy who owns a popular and profitable pizza parlor who is going to loose his shop because of some stupid investments e.g., a pizza-delivery helicopter. By all rights this guy should fail -- not because the pizzeria model is inherently flawed -- but because of poor investment risk management.

Now, in steps the mobster who thinks it would be nice to have pizza and convenient use of a helicopter whenever he wants. Flush with ill gotten cash the mafioso offers to keep up the helicopter payments for the pizzeria owner who can pay him back over time.

The owner might initially be tempted to raise pizza prices to pay off the debt (fuggetaboutit pal) but realizes he's better off as a wholly owned Mob front that can lower prices with impunity and price out the competition -- who might be helped by a stimulus package of their own.

The neighborhood is lost when the ownership consortium adopts an outreach to the community to ensure the propping-up coffers are kept full, lest the residents go without local shops. It's long past the point when competition is blocked by artificially low prices. Now the prices are only going up.

Distorting the market by changing the rules of the game and encouraging compliance is how government and business understand one another.

All the current calls for more regulation just mean a future of increased collusion, codependence, and manipulation between bad businessmen and worse government officials.