We cannot say we're shocked that the Federal Reserve and the Treasury swooped in to take over the American International Group US Department of Insurance. We began reporting that a takeover was under consideration shortly before two in the afternoon. But to say we expected this takeover is not to say we understand it.
We're told that this was necessary because the failure of AIG posed a systemic threat to the financial system. This gives rise to a riddle, however. If the financial system was threatened, why wouldn't the financial firms who were presumably staring into the abyss agree to build the bridge loan? Surely they would have had the most to lose from the collapse of AIG.
We know that the Federal Reserve and the Treasury Department worked hard to find a market based solution to AIG's problems. Morgan Stanley was hired as an adviser. JP Morgan and Goldman Sachs were asked to organize a lending syndicate. Government officials attempted to signal that they would allow AIG to go the way of Lehman Brothers unless private funding for AIG was found. None of this worked.
It looks as if the heads of our banks and Wall Street firms called the bluff of their comrades in the government's bank. Perhaps they never for a moment believed that the government would allow AIG to sink. Perhaps they knew that they could get New York's public officials and foreign governments frightened enough to pressure the government to act.
Or maybe, just maybe, they understood that the dynamics of government are very different from the dynamics of business. Executives in private-sector banks (to the extent such things continue to exist) stand to make or gain an enormous amount of money when the institutions under their care profit. Incentive pay, options grants, restricted stock have somewhat aligned their interests with those of their shareholders and the profitability of their firms, reducing what the economists like to call "agency costs."
No such incentive alignment has been undertaken with respect to taxpayers and government officials. If the money lent out to AIG is not paid back, Hank Paulson and Ben Bernanke will not suffer financially. If you ever wanted to see an agency cost roaring, the AIG takeover is your dream come true. What's more, the deal allows government officials the rare thrill of feeling that they are not only very, very relevant, they are now the masters of the universe, the warrior kings of Wall Street.
From the perspective of, say, Jamie Dimon, it must have been obvious that the government would bail out AIG. Everything he knows about human behavior would have told him this. The bailout was overdetermined. If he was surprised, it was no doubt by the brevity of the resolve of the Treasury and the Fed not to offer up money. Remember, we reported that a takeover was in the works before 2 in the afternoon. At that point, it had been under discussion for hours.
So maybe we do understand this thing after all. One one woman recently said to us: "The only difference between Wall Street and the Titanic is that the Titanic had a band." It's an old joke but still clever. The Titanic might have been billed as an unsinkable ship. But it turned out it could sink. Wall Street simply believes that, while it may lose a few compartments every couple decades, it is unsinkable.
Posted by guest , Sep 17, 2008 9:20AM
why 79.9% ownership in both deals?
Posted by guest , Sep 17, 2008 9:22AM
Thought your first shot of the day would be longer Carney...but your second paragraph is right on the fucking money. No one in MSM is making that an issue...
Posted by beentheredonethat , Sep 17, 2008 9:24AM
Oh, that last sentence. I cringe anytime someone writes that. History does repeat.
Posted by guest , Sep 17, 2008 9:24AM
Too long, didn't read.
Posted by guest , Sep 17, 2008 9:24AM
Okay, so AIG down. Looks like WM is next, what happens with them?
Posted by guest , Sep 17, 2008 9:25AM
very well put. why can't wsj or nyt be this succinct.
Posted by guest , Sep 17, 2008 9:26AM
With an $85 billion takeover, and a $3 share price. We all own about 80 shares of AIG
Posted by guest , Sep 17, 2008 9:26AM
AMERICAN *****INSURANCE****** GROUP?
Carney down graded to underperform.
Posted by guest , Sep 17, 2008 9:28AM
@5...FDIC takes over and sells to JPM in fire sale. No IndyMac repeat.
Posted by Anal_yst , Sep 17, 2008 9:29AM
@1
Once they go over that threshold the government has to consolidate the entity onto its books.
@ Carney
While there may be little-to-no immediate or direct (you don't think Paulson's wealth is all in some magical risk-free investment vehicle, do you?) financial cost if the Gov't screws up, to people of such mindset the blow to their reputation if they f' up is devastating. This, in turn, is also tied to their financial well-being, insofar as lets say in the example of Bernanke, if he makes it through the next 5-10 years as Fed Chairman, he stands to collect a butt-load of money pimping himself out to the private sector, but only if he doesn't screw up.
Posted by guest , Sep 17, 2008 9:32AM
@10...if the beard doesn't screw up - meaning he hasn't already?
Meanwhile I'm starting a hedge fund called Moral Hazard LLC...
Posted by guest , Sep 17, 2008 9:32AM
stfu JC, let BL write, or make your posts humorous (yeah i'm havin a bad day)
Posted by guest , Sep 17, 2008 9:33AM
...good enough as any reason to have some drinks. Meet at the Ketch tonight - corporate card's buying!
Posted by guest , Sep 17, 2008 9:33AM
MS getting shorted into the ground.
WaMu...they're the next weekend. Didn't you get the memo?
Posted by guest , Sep 17, 2008 9:36AM
doesn't "wag", a british slang acronym, mean "Wives And Girlfriends"? Is Carney hitting up Posh Spice for tips? Or maybe Rooney's hot shortie?
Posted by guest , Sep 17, 2008 9:37AM
Too short, read it all.
Posted by girl , Sep 17, 2008 9:38AM
This made me laugh:
"Executives in private-sector banks... have somewhat aligned their interests with those of their shareholders..."
Not when they're guaranteed upwards of a 200 million dollar thank you gift for failing.
Posted by guest , Sep 17, 2008 9:38AM
should the be smoking MS this hard at the open?
Posted by guest , Sep 17, 2008 9:40AM
ouch GS
Posted by guest , Sep 17, 2008 9:43AM
FDIC out of money?
http://biz.yahoo.com/ap/080916/bank_deposits_safety.html
Posted by guest , Sep 17, 2008 9:48AM
@8 you are retarded and wrong
Posted by guest , Sep 17, 2008 9:48AM
Carney the problem with your idea is that you still think Wall Street could have saved AIG if they wanted to. They aren't exactly having an easy time saving themselves and they're supposed to come up with the cash to save AIG?
Posted by guest , Sep 17, 2008 9:49AM
isn't it possible that gs/jpm just couldn't come up with the money in time? $85 bucks is an awful lot of commitment in the current state of each institution, and it was probably either the fed or other sovereigns to step in.
Posted by guest , Sep 17, 2008 9:50AM
I thought AIG was supposed to open a 0.50 cents?
Posted by guest , Sep 17, 2008 9:55AM
@ 10, can you expound just a little on the threshold/consolidation question, or give me a nice keyword I can use on Wik?
Posted by guest , Sep 17, 2008 9:55AM
Wall Street doesn't have to exist, and if our economic model/system is proven not to work then we're going to have a hard time convincing other nations to adopt it.
Posted by guest , Sep 17, 2008 9:56AM
Damn, dogmatic libertarians are as tedious as a Kos kid.
Posted by guest , Sep 17, 2008 9:58AM
someone needs to ask who the fuck keeps shorting one bank after another into the ground.
it's not a coincidence, and it's far to orderly and methodical to be a spontaneous market self-correcting mechanism.
markets don't fail ONE NAME AT A TIME.
There's a sniper out there.
Mark it.
Posted by guest , Sep 17, 2008 9:58AM
@ 26.
happy 12th birthday.
children should be seen and not heard.
Posted by guest , Sep 17, 2008 9:59AM
Someone should look into polical affiliations of Dick Fulk and Hank Greenberg/Bob Willumstead. I think Dick is a Democrat and Hank/Bob both Republicans. Interesting.....
Posted by guest , Sep 17, 2008 10:00AM
@ 26: If Wall Street didn't exist, someone would invent it.
get-a-clue.
Posted by guest , Sep 17, 2008 10:00AM
@21
8 Here
you stupid fucking monkey. Carney originally referred to AIG as "American Insurance Group". I do not think it is called American Insurance Group.
What part of Lehman's Mortgage desk do you "work" on?
Posted by guest , Sep 17, 2008 10:00AM
@20...they are not out of money, just below a historical threshold. That article just lays the worst of the worst and they would still have money to insure your account.
Posted by miami , Sep 17, 2008 10:00AM
The reason that 'threatened players' didn't save AIG is they didn't have $80 BILLION to lend them.
Come on, Carney, this is simple stuff.
Posted by guest , Sep 17, 2008 10:03AM
Jim Rogers is sitting comfortably in Singapore, with Swiss bank accounts, famously and notoriously shorting bank stocks. It is way too methodical-ONE NAME AT A TIME. Either Rogers or a consortium are taking revenge on the printing presses.
Posted by guest , Sep 17, 2008 10:03AM
meanwhile, Russia's screwing free enterprise again.
The largest exporter of crude in the world doesn't crash its equities overnight because oil sells off.
what happened to all the dollars they've been raking in for the past 5 years on the crude bubble?
don't trust them, either.
Posted by guest , Sep 17, 2008 10:05AM
@ 35. maybe as a useful idiot.
Let me give you a clue about what I'm alluding to: what do bear raids and bank runs have in common with hijacked jets and skyscrapers?
Posted by miami , Sep 17, 2008 10:06AM
37 - Nothing. Evidently you are the useless idiot.
Posted by guest , Sep 17, 2008 10:09AM
Jim Rogers is sitting comfortably in Singapore, with Swiss bank accounts, famously and notoriously shorting bank stocks. It is way too methodical-ONE NAME AT A TIME. Either Rogers or a consortium are taking revenge on the printing presses.
Posted by guest , Sep 17, 2008 10:11AM
Duder You ask
“If the financial system was threatened, why wouldn't the financial firms who were presumably staring into the abyss agree to build the bridge loan? “
You cant loan what you don't have… Umm…Well you can but you see that was so 2005,
Is BB Rich Uncle Pennybags? I hear hes working on a deal to subout Treasury work to Parker Brothers. They are a bit overloaded at the moment.
Posted by guest , Sep 17, 2008 10:12AM
@29 & 31,
The worst isn't over yet. You'll be cashiers in wal-mart in a year or so. I'll be sure to tip you for packing my bags for me.
Posted by guest , Sep 17, 2008 10:16AM
What about management rejecting offers from PE? Was that because they thought the inevitable government bail out might treat them better than Flowers would have?
Posted by guest , Sep 17, 2008 10:16AM
Rogers is the only one out there wanting young bankers to "turn in their mazeratis" and says the commodity boom will be over when "farmers are driving mazeratis." I think he's an insane evil genius, and correct a lot of the time, but I think might be impractical. WHAT IS PRACTICAL is that he ADMITS to SHORTING BANKS. He's obviously not the only one...
Posted by guest , Sep 17, 2008 10:16AM
@ 38, well, the useful idiot thing was meant for Jim Rodgers as culprit, which you suggested. But apparently with your 3rd grade logic skills, you assumed I meant you.
As for the second question, the correct answer depends on whether or not there is a sworn enemy of capitalism that a) has penchant for using your own assets against you and b) has clearly identifiable modus operandii.
But of course, someone with his head in the sand couldn't possibly be expected to give it a moment's consideration.
Just a hunch.
Posted by guest , Sep 17, 2008 10:18AM
@ 41, how do you like bagging at Walmart?
No wall street, no walmart.
now run along. it's almost nap time.
Posted by Anal_yst , Sep 17, 2008 10:19AM
@ 44
Just let me get this straight, you're claiming that terrorist organizations are bringing down our financial system?
Posted by guest , Sep 17, 2008 10:19AM
@43 rogers, in concert with soros, in concert with foreign backers, could indeed be re-enacting the run on the British Pound, with a different target.
Posted by guest , Sep 17, 2008 10:21AM
@ 46. Just presenting facts in that context to provoke to thought the intellectual resources on DB.
Posted by guest , Sep 17, 2008 10:22AM
@ 46. Just presenting facts in that context to provoke to thought the intellectual resources on DB.
Posted by guest , Sep 17, 2008 10:23AM
No one considers this a solution, a bailout or a takeover.
It's a tourniquet. Your post is true but irrelavent.
Posted by guest , Sep 17, 2008 10:27AM
@47
That has been my thinking since this thing started. This is exactly like when Soros took out the pound. Started, in Finland and then rolled his profits up and used them against bigger and bigger targets.
As for the the Bin Laden thing, I don't think Al Qeada has the capital reserves to pull this shit off. Even if they did it would be inefficient. Why not just spend a million on a dirty bomb and use the rest to buy deep out of the money puts on the S&P. Going after the banking system one banks at a time without known what the Fed will do, is just silly if you're willing to kill people to make money.
Posted by guest , Sep 17, 2008 10:28AM
@48 I bet you support Ron Paul's campaign don't you? I will expose you to everyone.
Posted by Anal_yst , Sep 17, 2008 10:30AM
While I don't quite like thinking about it, mr guest brings up an interesting point:
Is it even feasible that terrorist groups (i'll leave the definition of which ambigious on purpose) have the resources - financial, and otherwise - to orchestrate a takedown of the global financial system in such a manner?
It scares me to think about it, but the questions remains, is it possible?
Posted by guest , Sep 17, 2008 10:32AM
41 - You buy at Wal-Mart?
Posted by guest , Sep 17, 2008 10:39AM
The tone is a bit off, but this would have made for a great leveragedsellout read. from the perspective of aig or something. actually the whole concept of too big to fail needs to be addressed.
Posted by guest , Sep 17, 2008 10:39AM
AIG = US Department of Insurance
pure gold, laughing at my desk
Posted by guest , Sep 17, 2008 10:43AM
@ 52 sorry. life doesn't always fit into that box that sits on top your cuff-linked Oxford.
Posted by guest , Sep 17, 2008 10:45AM
53. Is it possible.
If domestic hedge funds can be considered culprits in the bear run on BSC, why not any other entity with sub.stan.tially deeper pockets and an ideological commitment to the destruction of The Great Satan?
Why is everyone afraid to consider the likeliest explanation?
Allowing naked shorting in this environment is like giving free jet-pilot lessons to al quaeda.
Posted by guest , Sep 17, 2008 10:52AM
Agency problem! Agency problem! I am overjoyed that someone mentioned agency problem and agency cost today because that is the crux of the matter in this financial crisis. Shareholders (principals) exercise no control over management (agents) so management is free to do whatever it deems fit with stockholders' money.
Posted by guest , Sep 17, 2008 10:58AM
Does anyone think the government will ever sell their stake down the road?
Posted by guest , Sep 17, 2008 11:26AM
yes no. 60 they will
Posted by beentheredonethat , Sep 17, 2008 11:35AM
Okay, here goes. I'll say it once. You want the crux of this problem across the board? With all the financial engineering that has transpired in the last 1o years, Senior management does not understand their own balance sheets, and therefore have no idea of the risk parameters they are/were operating under. The guys who invented all this crap figured out how to create the product and trade the product, but are clueless to predict how they will react to exogenous forces. Therefore, nobody knows shit which is when it hits the fan.
Posted by guest , Sep 17, 2008 11:40AM
@62
Completely agree.
And you know who invented and sold us all this crap? John Hull (author of Options, Futures and Other Derivatives) and Alan White. All the models they fed us were based on unrealistic normal distributions. They made millions in "consulting fees" selling this crap to Wall St.
Yet, who's heard of them recently? I betcha they are now trying to get to testify as "expert witnesses" in all the lawsuits that will invariably fall out of this mess.
Who'll be holding them accountable?
Posted by beentheredonethat , Sep 17, 2008 12:02PM
I would blame the buyer more than the seller. The are more snake oil peddlers on Wall Street than one can count. It would be the duty (fiduciary) for the principals to steer clear of them. Obviously it didn't work out that way.
Posted by Anal_yst , Sep 17, 2008 12:46PM
Agreeed with btdt
caveat emptor kids, there's no replacement for thorough diligence, especially when your substitute is trusting the ratings agencies, what a joke
But, as I've already pointed out, in the end its leverage and poor risk management (intertwined with each other, that is) thats bringing down the house of cards, just as its been with every downfall through the last generation.
Something about learning from history comes to mind...
Posted by guest , Sep 17, 2008 12:57PM
@65,
you sound like a monday morning quarterback, one who has never had P/L responsibility.
(but you are right)
Posted by beentheredonethat , Sep 17, 2008 2:01PM
@66
No, we are all aware of it and have been through the entire runup. But with the renumeration structure on the street, no one says anything while the bonus pool coffers are being filled to the brim. Then evetyone gets paid and their happy as clams and starts out in a new year trying to top the previous year's over-leveraged results, which results in more leverage. Anyone who speaks up in the day in age in not so politley shown the door. That is how we got here. Totally Wednesday afternoon.
Posted by guest , Sep 17, 2008 4:53PM
1. Bankrupcy of AIG would have killed GS
2. Paulson would never let that happen (can't go his old co go bankrupt & he surly owns a lot of GS stock)
3. After saving AIG he appoints his GS buddy Liddy as new AIG CEO
=> GS runs Washington
Posted by guest , Sep 17, 2008 11:43PM
Just a Question, with no hostility: Does anyone find this odd that these firms are getting taken over one by one & perhaps govt as part of a part plan didn't help Lehman just to cover up? And, how do MS & GS's shares drop drastically after they report better than expected figures? And, govt goes and saves close to 80% of AIG when AIG's insurance policies really are fine, and its the derivatives that are causing havoc for AIG.
At this point, I wouldn't be shocked if the short selling & the rumor mill that drove down the market along with its players, was orchestrated by the govt...
My knowledge on the market isn't as proficient as many of yours, but was just wondering if anyone else finds it odd.
Posted by guest , Sep 20, 2008 11:34AM
The Rush to Bail Out…
The same psyche that led to the “Rush to War” is now leading us to history’s biggest taxpayer funded bailout of Wall Street. Reckless bets placed by investment banks have gone irretrievably sour and rather than face the music any individual investor would face, Wall Street, now taking on newfound socialist religion, pleas to preserve the common good. This plea is utter nonsense and here’s why. Bank “A” carries a mortgage backed instrument on its books, marking its value at say 85 cents on the dollar. Its true value is unknown but probably less than 50 cents. The Treasury steps in and buys it at 75 cents, the bank takes a small hit, leaving the taxpayer to stomach the difference and hope that maybe someday the money comes back, so far so good but now the really wicked part. Bank “A”, now knowing that it can unload all its toxic waste is now free to aggressively foreclose on homeowners as its balance sheet has been cleared. By selling the MBS to the taxpayer at prices that are orders of magnitude above the real market, the bank has a huge cushion to take on real assets as part of its balance sheet.
Additionally, the bank’s bondholders benefit immensely. Main Street is not being helped by this. Secretary Paulson has gone to extraordinary lengths to paint himself as the man on horseback coming to save the system. He is playing on the average congressman’s and average citizen’s ignorance of corporate finance. A corporation’s debtholders are highest in the pecking order, the common shareholders are lowest. The rich and the well connected own the debt, Main Street largely owns the common stock. By intervening, the government usually wipes out the common stock and saves the debtholders. Wealth is simply transferred from Main Street to Wall Street in this processs. Somber looks are given at press conferences as any great showman would but rest assured beneath the surface the reality is even more depressing as the country has now been rushed into an even more unwinnable war against an unsound financial system. At the end of the day excessive credit cannot be cured by extending even more credit but it sure can ensure that the rich and well-connected come out of the inevitable hardship in far better shape than the rest of us.
Where will the money come from? The US will be forced to sell bonds, the size required will drive interest rates higher as foreign governments are already choking on US debt they own. This inevitable process will defeat the key public objective of helping prospective homeowners obtain affordable mortgages. I’ll dodge discussing the implications for the US dollar. On Friday we saw the market’s reaction with crude oil soaring nearly 7 dollars a barrel. The market fears a dollar collapse and is rushing to buy real assets, this will also force interest rates higher.
Finally, let’s keep in mind that there is far more to come, the commercial real estate debacle is beginning to unfold, several months from now countless hundreds of additional billions will be needed to rescue the collapsing commercial real estate market and oh, by the way, just wait until the Chinese real estate market begins to fold.
Posted by guest , Nov 20, 2008 9:36PM
Is this the result of your Exclusive education on economics?shame, because of those geniuses style attitude you people forgot the very basic of economics,"survival"you people are so damned about your education that most of you relied on books than actual and basic science of economics,look at you guys, you made your selves suffer and yet at the end of the day money is still lost and companies were shutting down left and right,where all the money
went?basic , right?
heres the solution, quit your stupid
einstein looking attitude and be real that too much is bad and too little is worst, so meddle in the middle part only of any dealing and spend in investment not in different portfolio
just make it work in one investment scheme, its not true that having too much investment in different field makes your money tougher its baloney,
ok heres the deal just invest in one company and consentrate on it make it grow help yourself in helping others help themselves see after a year where it leads you beats me you will be more satisfied and calm.
Posted by guest , Nov 20, 2008 9:38PM
Is this the result of your Exclusive education on economics?shame, because of those geniuses style attitude you people forgot the very basic of economics,"survival"you people are so damned about your education that most of you relied on books than actual and basic science of economics,look at you guys, you made your selves suffer and yet at the end of the day money is still lost and companies were shutting down left and right,where all the money
went?basic , right?
heres the solution, quit your stupid
einstein looking attitude and be real that too much is bad and too little is worst, so meddle in the middle part only of any dealing and spend in investment not in different portfolio
just make it work in one investment scheme, its not true that having too much investment in different field makes your money tougher its baloney,
ok heres the deal just invest in one company and consentrate on it make it grow help yourself in helping others help themselves see after a year where it leads you beats me you will be more satisfied and calm.