Govt reportedly considering conservatorship of AIG

JeopardE · Sep 17, 2008

Quotes from above article:

A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size.

Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it. Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small.
Click to expand...

The forced unwinding of trillions of dollars in CDS contracts (a marketplace that is booming in the face of the credit crisis) ... wow. Plus the fact that many of these assets suddenly become uninsured and simultaneously collapse in value as AIG liquidates:

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow.

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.
Click to expand...

There would be nothing short of anarchy on the street if such a situation were to unfold in my opinion. Every man for himself ... we're looking at a complete collapse of the system.

lpbman · Sep 17, 2008

At what point do foreign banks start to question the solvency of the Federal gov and treasury bonds?

A hundred billion here, a hundred billion there... and pretty soon you're talking about a lot of money.

JeopardE · Sep 17, 2008

That's why I'm so terrified about McCain making statements like "the fundamentals of the economy are sound". The fundamentals are *THE* problem. If house prices don't stop falling, the endless stream of asset writedowns will not cease, and we'll only be delaying the inevitable. We're hoping the housing market has indeed bottomed, but if it hasn't, there will be more blood on the streets to come. If it has, then the upside is that at least the government is adding tangible assets to its portfolio that would enhance the future value of its bonds, and that should translate into less of a burden on the taxpayers.

SamFisher · Sep 17, 2008

freemaniam said:

It is fine if the majority eventually preferred to let the government officials to run the company as long as the general public has a way to get rid of those whom did not perform.
Click to expand...

Shareholders of AIG - even massive ones like Hank Greenberg, had very little recourse over the last year but to sell. Corporate Governance is skewed very very highly towards management which makes it a dictatorship, not really a democracy.

DaDakota · Sep 17, 2008

SamFisher said:

Shareholders of AIG - even massive ones like Hank Greenberg, had very little recourse over the last year but to sell. Corporate Governance is skewed very very highly towards management which makes it a dictatorship, not really a democracy.
Click to expand...

This is what I was having a discussion with a friend last night about renumeration.

He was ok with that lady getting canned from HP and getting $40 million because the board gave it to her. He said the shareholders could have voted it out.

And I said that there are so many shareholders now, they do not pay attention to those things, just the share price, there has to be some way of stopping the giving of massive bonuses not tied to company performance.

I doubt very few people would have an issue with someone making a large bonus if he/she led the company into substantial profitability, but these payouts for failure are just horrid.

DD

robbie380 · Sep 17, 2008

wow if this aig deal didn't happen i would have been down 300. thank god i am finally out of everything and still up for the month. everything is ****ed right now. no one is lending money.

and now s&p said our AAA is getting pressured and that it is not a god given right for us to have that rating

JeopardE · Sep 17, 2008

robbie380 said:

wow if this aig deal didn't happen i would have been down 300. thank god i am finally out of everything and still up for the month. everything is ****ed right now. no one is lending money.

and now s&p said our AAA is getting pressured and that it is not a god given right for us to have that rating
Click to expand...

Ugh. Overnight rates spiking, everyone hoarding cash, CDS spreads exploding, and now fed AAA in question.

Just the nightmare scenario I didn't want to wake up to. Still hoping and praying that something happens to finally stop this madness before the virus spreads from derivatives and starts to destroy the real economy.

rimrocker · Sep 17, 2008

JeopardE said:

We're hoping the housing market has indeed bottomed, but if it hasn't, there will be more blood on the streets to come.
Click to expand...

It has not and it will not until prices are more in line with income and the traditional mortgage structure. All this interest only, balloon, jumbo crap has to go.

Sweet Lou 4 2 · Sep 17, 2008

McCain's economic adviser - possible secretary of the treasury - may actually be pretty responsible for the current crisis with AIG and other banks by removing laws that prevented financial institutions getting involved with insurance (AIG's problem), derivitives trading limits (leman brothers, meryll lynch, bear sterns, and predatory lending (many savings and loans, freddie mac, fannie mae).

http://www.gather.com/viewArticle.jsp?articleId=281474977373777

i think this deserves a new thread, but right now i can't post new threads. I might be being punished for one of the flippant threads i started last week about the monkey vs. palin. so i guess i deserve a bit of a suspension.

SamFisher · Sep 17, 2008

Sweet Lou 4 2 said:

McCain's economic adviser - possible secretary of the treasury - may actually be pretty responsible for the current crisis with AIG and other banks by removing laws that prevented financial institutions getting involved with insurance (AIG's problem), derivitives trading limits (leman brothers, meryll lynch, bear sterns, and predatory lending (many savings and loans, freddie mac, fannie mae).

http://www.gather.com/viewArticle.jsp?articleId=281474977373777

i think this deserves a new thread, but right now i can't post new threads. I might be being punished for one of the flippant threads i started last week about the monkey vs. palin. so i guess i deserve a bit of a suspension.
Click to expand...

one of his other economic advisers is columnist Kevin Hassett.

You may remember him from a little book he wrote called "Dow 36,000"

rimrocker · Sep 17, 2008

From the WaPo... I guess this means our Chinese overlords are now even closer to actually owning the country...

Fed Asks Treasury Dept. for Funds to Backstop Intervention Efforts

By David Cho
Washington Post Staff Writer
Wednesday, September 17, 2008; 12:55 PM

The Federal Reserve has requested that the Treasury Department deposit $40 billion with the central bank in an effort to help the Fed continue to stabilize the financial markets and address concerns about whether it is overstretched.

The Fed's extraordinary series of efforts to pump extra funds into the financial system and bail out such firms as American International Group and Bear Stearns with mammoth loans has depleted its store of Treasury bonds. The central bank will use the funds to offset the amount of money it has injected into the markets in its rescue efforts.

"By over-funding itself and placing those funds at the Fed, the Treasury is expanding the Fed's balance sheet in a way that will give the Fed the ability to conduct further operations to support the financial market functioning, should the need arise," said Michael Feroli, an economist with J.P. Morgan Chase.

The department is raising the $40 billion by auctioning bills, known as Treasurys.

Central banks around the world are taking dramatic actions to contain the crisis in the credit markets, pumping more than $280 billion this week into the financial markets, including $70 billion from the Federal Reserve.

Many banks are now charging very high rates to lend to each other, and some institutions have closed their windows altogether -- a sign of how tight borrowing has become. The benchmark overnight lending rate for these banks, called the London interbank offered rate, or Libor, nearly doubled to 6.4 percent, the highest jump on record.

The loss of confidence in the credit markets pushed interest rates on Treasuries lower as investors looked for safe places for their money. This happens because the more investors demand Treasuries, the lower the rates sink. Rates on the three-month Treasury bill, for instance, fell at one point this morning to 0.23 percent, the lowest since at least the 1950s.

Meanwhile, Russia halted trading on its two stock exchanges and injected billions into three former state-owned banks as questions were raised about whether these institutions would remain viable. These banks had accepted a wide range of collateral for loans, including stocks that have fallen more than 50 percent over the past several months.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091701403_pf.html
Click to expand...

rimrocker · Sep 17, 2008

And now the FDIC is also short on funds...

Federal bank insurance fund dwindling

By MARCY GORDON, AP Business WriterTue Sep 16, 7:49 PM ET
http://news.yahoo.com/s/ap/20080916...y&printer=1;_ylt=AjPyp0hHLBKQCuyLTXoGD6lv24cA

Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.

But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.

The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.

FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.

The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.

Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.

Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.

A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.

By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.

Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.

Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.

WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.

Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.

These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.

If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.

Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.

Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.

But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.

"While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"

Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts — considered to have adequate capital and to be well managed — paid no premiums to the FDIC. Today, all of them do.

There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.

Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets. "More banks will come on the (troubled) list as credit problems worsen," he said. "Assets of problem institutions also will continue to rise."
Click to expand...

Invisible Fan · Sep 17, 2008

I saw Roubini calling for Congress to give a trillion dollar recapitalization asap. Otherwise panic will increase fast and people will think they're doomed.

MoonDogg · Sep 17, 2008

Gold, guns & grub.....the currency of the new 21st century, brought to you by all the greedy mofos out there...

Kwame · Sep 17, 2008

when is the bottom coming? somebody, anybody...

LouisianaRocket · Sep 17, 2008

So is our country in deep doo-doo because of this?

rimrocker · Sep 17, 2008

LouisianaRocket said:

So is our country in deep doo-doo because of this?
Click to expand...

Yes... though it is really just the manifestation of a greater infection.

Phillyrocket · Sep 17, 2008

Socialism, 21st Century Style

by Floyd Norris

Wednesday, September 17, 2008

The government Tuesday nationalized the American International Group, the financial giant that could not find anyone else willing to lend it the billions of dollars it needed to stay afloat.That is not the official version. Fed staffers, who briefed reporters at 9:15 Tuesday night, don’t even want us to say the government will control A.I.G. The government will name new management, and will have veto power over all important decisions. And it will have a warrant allowing it to take 79.9 percent of the stock whenever it wants. But they contend there is no control until the warrant is exercised.

President Truman once tried to nationalize the steel industry, arguing that a strike that halted production in wartime created a national emergency. The Supreme Court ruled that was illegal. This time, however, the company agreed to the nationalization. It was the only way to get the cash it desperately needs.The Federal Reserve and the Bush administration believe the threat of defaults by A.I.G. on a lot of unregulated derivative contracts creates a national emergency. It’s too bad they didn’t think of that when they were opposing any efforts to regulate those markets. That would have been interfering with free enterprise. This move, somehow, is not.

The official line is also that taxpayer money is not being put at risk, since the $85 billion loan is well collateralized. No group of banks was willing to make such a loan, so you have to wonder if the collateral is really that good. And the government will not say if it will loan more should that be needed to keep A.I.G. from collapsing. It was said that only a conservative anti-communist such as Richard Nixon could overcome domestic opposition to talking to what was then called Red China. Perhaps something similar is at work here. Can you imagine what conservatives would say if a liberal Democrat had moved to nationalize major financial companies?

http://finance.yahoo.com/banking-budgeting/article/105768/Socialism-21st-Century-Style

LouisianaRocket · Sep 18, 2008

rimrocker said:

Yes... though it is really just the manifestation of a greater infection.
Click to expand...

so, when does the depression start?

pppbigppp · Sep 18, 2008

Seems like trickle down economy down at its best again. These top dogs surely do flush their loss right into everyone's bottom line. Hope you all enjoyed being fingered by the invisible hand.

Socialize the loss, privatize the profit.

the fundamentals of our economy are strong

--John McCain, Sep/15/08
Click to expand...

wtf

Forums

Govt reportedly considering conservatorship of AIG

JeopardE Member

lpbman Member

JeopardE Member

SamFisher Member

DaDakota Balance wins
Supporting Member

robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
Supporting Member

JeopardE Member

rimrocker Member

Sweet Lou 4 2 Member

SamFisher Member

rimrocker Member

rimrocker Member

Invisible Fan Member

MoonDogg Member

Kwame Member

LouisianaRocket Member

rimrocker Member

Phillyrocket Member

LouisianaRocket Member

pppbigppp Member

Share This Page

About ClutchFans

Rockets Content

Support ClutchFans!

Govt reportedly considering conservatorship of AIG

JeopardE Member

lpbman Member

JeopardE Member

SamFisher Member

DaDakota Balance wins Supporting Member

robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ) Supporting Member

JeopardE Member

rimrocker Member

Sweet Lou 4 2 Member

SamFisher Member

rimrocker Member

rimrocker Member

Invisible Fan Member

MoonDogg Member

Kwame Member

LouisianaRocket Member

rimrocker Member

Phillyrocket Member

LouisianaRocket Member

pppbigppp Member

Share This Page

DaDakota Balance wins
Supporting Member

robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
Supporting Member