Wednesday Blogging – 9/17/08

PHOTO: Communist Flags

Woop woop. Consider this an open thread until I post something substantive… any requests?

11:45am
We’re all communists now. “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.”

When Jim Cramer was on MSNBC this morning, he was asked what the strongest banks left were… his #3 pick was BB&T out of North Carolina. Ha.

2:45pm
Matt Yglesias has a great post up about the economic costs of the Iraq war, which are especially salient given our current Wall Street crisis. Here’s the money quote:

Ultimately, American military power is built on our economic power and not the other way around. There’s no sense in maintaining a defense posture that ultimately squanders, rather than defends, the real strength of the country.

I think it was Bill Maher who I first heard say that we could have bought off every Iraqi, and even Saddam, for less money than this war has cost us.

3:00pm
Here’s a link to the stick figure presentation on Subprime mortgages that Ted sent me yesterday. Very funny, very informative and very depressing.

4:20pm
Steven Davidoff explains why the government only bought 79.9% of AIG:

It can’t be more than that, because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency. The purchase isn’t even a purchase of the stock of the company. Rather, it is a purchase of warrants giving the federal government the right to buy some number of shares. This permits the federal government to further claim that it doesn’t even have an ownership interest.

Gotta love it. We own AIG, but technically we don’t. Is there any doubt that the high bulls*** factor of finance is at the heart of the current problems?

6:00pm
Bob Kuttner offers a straightforward, although not simple, explanation of what went wrong on Wall Street and ideas for fixing it.

Meanwhile, Ezra Klein reminds us we should be pissed about all this (unless we made millions of dollars off the subprime market):

[There’s] a basic unfairness we should recognize: The resolution to the past decade or so of rocketing wealth in the finance sector will be that all those guys remain jaw-droppingly rich while taxpayers pay off hundreds of billions of their bad bets. Making it all the more galling, the very traders who forced us into this mess will escape not only the bill, but they’ll be exempted from even paying their portion of the tax bill.

Goodnight everyone!

Flickr photo by nic0

11 Comments

  1. Ian

    Post something so Sheepy will maybe come in here and explain the financial situation to us.

  2. Sheepywoman

    What do you want to know?

  3. Ted

    Chris can you post the CDO powerpoint presentation I sent you?

  4. Chris

    Funny you say that Ted… I was thinking of doing exactly that.

  5. Ian

    Well, I want to know what exactly this means for the average American citizen. The government keeps posting these enormous bailouts. I don’t understand where this is all going. Like we bail these companies out, but that doesn’t make the company any better. It doesn’t erase what got them in trouble in the first place. I don’t understand the long term goals of this. So what is the point of all this again beyond trying to avoid a mass panic?

  6. Ted

    Ian if I understand correctly, none of these loan procedures were regulated (properly) before… so what it means for the average American citizen is that it will be much tougher to get approved for a loan from the bank. There will be stricter guidelines, if nothing else just guidelines at all.

  7. Ian

    Ted, I kind of hope this to be the case. I mean, I want there to be some sort of regulation imposed after this so it doesn’t happen again.

    My question was more along the lines of what happens to these companies? Surely just facilitating their sale with taxpayer money doesn’t make the company 100% OK. The loans that went bad, well something has to absorb that, right? Does that all just get “erased” as a loss, or is it still on the books? There’s the question of what happens to the money the taxpayers paid (or will pay) for these companies. I’ve heard people suggest that it gets paid back to the taxpayer, but I sort of get the feeling this won’t quite happen like we all think. I’m more thinking about how this affects the average taxpayer, not one necessarily looking to buy a house at the moment. We keep bailing these companies out but there has to be some sort of consequences right?

  8. Sheepywoman

    Let me start by saying its crap that AIG is getting bailed out. Bear Stearns was different; it was a bank run where investment banks got scarred about Bear Stearns’ ability to pay it’s creditors and all their counterparty banks started pulling out their money and investments at once. It was a panic. And as a broker-dealer, the firm helps provide liquidity in the market so the Fed had to step in otherwise there would have been a domino effect on the street. AIG is going bankrupt b/c their credit rating dropped on their loans. This is turn made their loans worth less and they had to pay more money in margin requirements. They, like Lehman, failed b/c of their own incompetance. But if you really want to blame someone, it’s the credit rating agency’s (Moody’s, S&P) who overrated loans that were derivatives of mortgages.

    So what’s it got to do with us? A lot. Has anyone tried applying for a credit card lately? It’s tough and the rates/incentives aren’t as good. I was explaining to Charlie last night about re-insurance where insurance agency’s sell the insurance to help relieve some of the liability. And then there is the trickle-down: it’s harder for farmers to get loans for next year’s crop and the increased expense is felt by consumers. Granted, that’s a stretch but when the market tightens, it tightens everywhere. Mostly in disposable income but we’ll be feeling it with everything as we are entering a global depression (yes, global).

    As far as the “now what” question, no one knows. Seriously. The Fed has been throwing rates against the wall to see what sticks but I’m not confident they, nor anyone else on the street, is really sure where the market is going. And a lot of people believe we have yet to reach bottom.

    Why save AIG? Not sure since Lehman failed. In school they taught us about the Too Big To Fail ideal held by big banks. They take on more risk b/c they are so big that if they fail they know the government will bail them out. But if AIG went under, that’s a lot of people without insurance and it would be increasingly difficult for them to go elsewhere.

    Think about this: Lehman Bros. has ~30K employees. AIG employes 116K people. How do these firms going under effect you? What would you want the Fed to do if you were a customer? An employee?

  9. Sheepywoman

    Wow, that took so long to write, I missed posts 5-7! It’s all paper money Ian. The value of the loans were derrived from securities that fundamentally held less value than appeared. It’s like the dot-com, the money was never really there, people just spent like it was. The Fed requires the reserve at each bank to be met to pay for failed banks. What they are paying for is your checking account so you can access your money. You can write off bad debts and AIG will probably do this but they still hold good investments. AIG will be able to survive but they needed a cash injection to pay the rent and electric bill.

  10. Ian

    That’s the kind of stuff I wanted to know about. Thanks Sheepy 🙂

    I’m glad the government is bailing these companies out if it prevents complete free fall in the market. I just hope what rises up out of all of this mess is a long term solution and stabilization.

  11. Jordan

    Be creative: http://www.designforobama.org/