Tulip Time in America

More: Overwhelmed by the global financial consequences of AIG's bankruptcy, the US government relented late Tuesday and agreed to give the failing insurer an $85 billion loan. The action is an unprecedented and historic intrusion on the so-called "free market" at the expense of US taxpayers. Never before has the credit of the United States been extended to a privately owned financial firm on such a huge scale. But because AIG has become a worldwide insurer of esoteric financial instruments, the US Treasury was forced to help it or face the consequences of panic in world markets. Without doubt the notion of "free markets" regulating themselves without government "interference", popular among conservatives in Washington including the current GOP presidential candidate, has been totally discredited by the today's risky intervention. It is probably not the last either. Washington Mutual, the nation's largest savings and loan, is also on the edge of failure. This process of underwriting private investment risk, much of which has been clearly imprudent, with credit backed by public tax revenue is by definition, socialistic. But because the benefit is restricted to a relatively small class of investors it must be fairly termed socialism for the rich.

Update (9/16/08): Things are looking bleak for mega insurer AIG. Talks to rescue the giant firm are up against the hard guy, Mo' money. AIG needs in the neighborhood of $75 billion to meet liquidity and collateral needs, and nobody is coming forward with a handout. Recently the Feds plunked down $29 billion to underwrite the purchase of private investment bank Bear Stearns by JP Morgan Chase. Wall Streeters expected the same sugar daddy treatment for Lehman Brothers. But Secretary Paulson made it clear Monday no more public money should be used to bail out Wall Street firms dying from toxic mortgage shock. None of the private banks in the negotiations, JP Morgan Chase, Goldman Sachs or Morgan Stanley are willing to advance a credit line without central bank backing. New York's governor allowed the insurance company to borrow $20 billion from its solvent subsidiaries in a stock exchange deal, but that is not enough. Credit agencies downgraded AIG's rating last night, triggering collateral calls of $10.5 billion on derivative contracts (credit default swaps) it owns. If the Feds do not relent on not making you pay for Wall Street's greed the company will file for bankruptcy as early as tomorrow. The market impact of AIG going bankrupt could be even greater than Lehman Brothers' bankruptcy since the company became one of the largest insurers of mortgage-backed securities, intertwining it with major banks around the world. AIG sold credit default protection in the form of swaps on $57.8 billion worth of mortgage backed securities. Before now there were few credit defaults, so writing swap contracts was an easy way to make money. Swaps trading has become a major part of the financial system. The unregulated swaps market, which is heavily leveraged, is nearly four times as large as the U.S. stock market ($62 trillion). It touches most every major financial institution, hedge fund, and mutual fund manager in the world. And it has never been tested in a major deflationary crisis like the current one.
[photo credit: Mother Jones. Phil Gramm, co-chair of the McBush campaign and its "Econ Brain" inserted the "Commodity Futures Modernization Act" into a last minute omnibus spending bill in December 2000. The bill passed even against Senator Gramm's expectations. It prohibited regulation of swaps as well as energy trading, thus allowing Enron to run rampant in the California energy market costing consumers billions before it too collapsed. Gramm now works as a highly paid executive at Swiss bank, UBS.]

(9/15/08) Well Kimosabe, the biggest unraveling of the financial sector since 1929 finds the federal government shelling billions of your tax backed dollars into the black hole of the deflating real estate market. The feds did draw a line in the event horizon after saving its stepchildren, Freddie and Fannie, when it refused to buyout Lehman Brothers, the world's fourth largest investment bank. Barclay's and Bank of America pulled out of negotiations to rescue the 158 year old firm when Uncle Sugar refused to pony up any more over the weekend. The feds apparently made the weighty decision to let Lehman go under rather than risk the collapse of the US treasury bond market as foreign investors reappraise the credit worthiness of treasury bonds, and therefore the US dollar in the face of a stream of huge, unprecedented bailouts. Lehman's default on its derivatives exposure, estimated to be $200 billion, will send storm waves through the financial markets swamping its highly leveraged counterparts. Bank of America has bought securities broker Merrill Lynch in a government brokered deal to prevent its collapse. That is the second troubled institution B of A has purchased after buying Countrywide Financial earlier to avoid institutional collapse further shocking the markets. The dirty little secret is that most big western banks are insolvent[1]. So it is likely the federal government will be asked to undertake even larger rescues of financial institutions considered critical to avoiding a world-wide panic and depression, and to make cut rate loans to other distressed industries such as airlines, insurers[2] and auto manufacturers.
Wackydoodle sez: I don't mean to be a "whiner" but all these here "economic adjustments" are a givin' me a "mental recession"!
[1] UK Market Oracle 9/14/08
[2] The New York Federal Reserve Bank is in meetings with American International Group (AIG) the world's biggest insurance company. The New York state insurance commissioner has asked the federal government to loan AIG mo' money. News reports indicate that the Feds have hired Morgan Stanley to review its options concerning AIG. The insurer has lost $18 billion on guarantees of securitized mortgaged loans. AIG stock is down 80% this year.