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Government steps in again, bails out AIG with $85B

Old 09-17-2008, 06:53 AM
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Default Government steps in again, bails out AIG with $85B

Government steps in again, bails out AIG with $85B - Yahoo! News


WASHINGTON - Another day, but not just another bailout. This one's a stunning government takeover.

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 Inc. with an $85 billion injection of taxpayer money. Under the deal, the government will get a 79.9 percent stake in one of the world's largest insurers and the right to remove senior management.
AIG's chief executive, Robert Willumstad, is expected to be replaced by Edward Liddy, the former head of insurer Allstate Corp., according to The Wall Street Journal, citing a person it did not name. Willumstad had been at the helm of AIG since June.
A call to AIG to confirm the executive change was not immediately returned.
It was the second time this month the feds put taxpayer money on the hook to rescue a private financial company, saying its failure would further disrupt markets and threaten the already fragile economy.
AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.
Under the deal, the Federal Reserve will provide a two-year $85 billion emergency loan at an interest rate of about 11.5 percent to AIG, which teetered on the edge of failure because of stresses caused by the collapse of the subprime mortgage market and the credit crunch that ensued. In return, the government will get a 79.9 percent stake in AIG and the right to remove senior management.
AIG shares sank $1.34, or 36 percent, to $2.41 in morning trading Wednesday. They traded as high as $70.13 in the past year.
The government's move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.
The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.
It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.
The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.
The White House said it backed the Fed's decision Tuesday.
"These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy, " White House spokesman Tony Fratto said.
After meeting with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in a late-night briefing on Capitol Hill, Congressional leaders said they understood the need for the bailout.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times. Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse," said Sen. Charles Schumer, D-N.Y.
In a statement late Tuesday, AIG's board of directors said the loan will protect all AIG policy holders, address concerns of rating agencies and buy the company time to sell off assets.

"We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets," the statement said. "In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG."
New York officials said the deal helps stave off a fiscal crisis for the state. AIG is based in New York.
"Policy holders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.
In an interview on ABC's "Good Morning America" program Wednesday, former longtime AIG CEO Maurice "Hank" Greenberg was asked whether critics are being fair who say the situation at AIG and the financial markets generally happened because of greed, bad business practices and corruption.
"No, I think it's an unfair appraisal," said Greenberg, who was replaced as CEO three years ago as part of an accounting probe. "You know, there are many things that contributed to this unfortunate episode. after I left the company, all the risk management procedures that we had in place were obviously dismantled. I can't explain that. There's a new board of directors. One should be asking that board of directors what they did and why."
Greenberg said he has lost "my entire net worth. Literally, my entire net worth.'
"Worked 40 years building the greatest insurance company in history, one that everyone in the world envied who was in this industry. I'll get by, but my heart goes out for the thousands and thousands of employees and their families who shareholders and not only in the united states but worldwide. That is a tragedy," he said.
The Fed's move was part of a concerted push to help calm jittery markets and investors around the world.
On Tuesday, the Fed decided to keep its key interest rate steady at 2 percent, but acknowledged stresses in financial markets have grown and hinted it stood ready to lower rates if needed.
The central bank also pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely.
The stock market, which Monday posted its largest point loss session since the Sept. 11 attacks, recovered Tuesday after the Fed's decision on interest rates. The Dow Jones industrials rose 141 points after losing 500 points on Monday.
AIG's shares swung violently, though, as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours.
The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers. The worries were heightened Monday after Moody's Investor Service, Standard and Poor's and Fitch Ratings lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.
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Old 09-19-2008, 12:24 PM
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I just bought 700 shares. Lets hope they can get back to their $60-70 range and then I will have made mint.
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Old 09-19-2008, 07:18 PM
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Originally Posted by capncrunch View Post
I just bought 700 shares. Lets hope they can get back to their $60-70 range and then I will have made mint.

Good luck to you....

I'm holding out till this short selling ban is up to put anymore into financials...hopefully there will be some good deals in a few weeks....We'll see what happens... hard to say exactly.... thinking about waiting til BAC drops to $25 +/- (hope it actually happens)
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Old 09-20-2008, 02:49 AM
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Frankly, I'd rather see some bailouts and more gov't control than to have the financial markets and the economy as a whole implode on its self.

However, according to the head of the IMF, this is just the beginning for all of the world's financial markets. We may be heading toward that one world currency or cashless society after all.


atp
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Old 09-20-2008, 09:11 AM
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Originally Posted by atpwannabe View Post
Frankly, I'd rather see some bailouts and more gov't control than to have the financial markets and the economy as a whole implode on its self.

However, according to the head of the IMF, this is just the beginning for all of the world's financial markets. We may be heading toward that one world currency or cashless society after all.


atp
Just another step towards socialized capitalism....

Total bailouts so far equates to about $2000 per person in America

Bailouts are bad long term idea, look at history.
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Old 09-21-2008, 08:33 AM
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Bailouts are HORRIBLE. They kill free market. I basically just had $5k stolen from me by the government because I owned a few short contracts. Not a good feeling. Explain to me how it's legal? I purchase a contract that is out there then the govt steps in and says "Hey we'll allow you to dump all your bad assets onto an imaginary bank then we'll purchase up to 700 billion worth then we'll ban short selling so the market CANT go down"! This neglects the actual value of a stock. This is nothing more that market manipulation which is costing people billions. They aren't losing billions because they made a bad choice. They're losing it because the gov't basically just walked in and took it.

It's like going to a roulette wheel and placing a bet on black and red and then the casino says "Sorry folks no more red" and just takes your chips. My options expired in OCT 19th so now that they've banned them till the 3rd they'll have lost half their value regardless simply because of the time left.

They're talking about market manipulation as if the shorts, who only held about 4.2%, were the ones doing it. Shorts are required to keep the market honest. This isn't the great depression where they ran upwards of 20+%. 4% is not out of the norm. The reason the financials suck is because they ran themselves into the ground. They're worried about people not having confidence in our market yet somehow believe walking in and regulating it is going to do the job.

How many people in the government own stock and were directly affected by it's actions? How many people own shares in the companies that just jumped about 800 points? Insider trading that's slapping the country across the face.

The only way our market can be successful is if it's allowed to fail. Fannie and Freddie were part gov't and takeover was ok. AIG should be forced into BK along with anyone else. BAC, Citigroup, Barclays, HSBC, etc can easily pick up the tabs on their debts and emerge as very successful companies.

Read my signature for the rest and explain to me how it's legal. I'm not paying for someone elses mistakes when they don't give a damn about any I make on my own. Now the Dems want to include where the 700bil bailout will help keep people in their homes. What BS!!! If they can't afford it then they shouldn't have bought it. I'm not here to help people who bought homes as investment properties or all the sudden realize they can't afford their bills. You make your bed you sleep in it. Now I'm picking up the tab because I tightened my belt and made good decisions.

This is just the beginning. Mark my words. There are billions being left on the table by this ban. The value of my shorts went from $3.15 per share to $1.05 per share currently. There will be lawsuits out the wazoo on this. When it comes to markets the worst thing the govt can do is intervene.

They are idiots. The US currently pays about $400 billion a year in interest ALONE, roughly $1300 per person and thats IF they all paid taxes, on the debt it already has and now it wants to up that another $700 billion and that's before the $100+ billion stimulus pkg the Dems want to push though (shortly after downing Bush for making the first one which is pure irony) and other things they are wanting to do.

They're establishing a double sided financial system where only the small are held accountable and there couldn't be a more wrong way to go. I know I didn't get a PHD in economics but considering the fact all we do is go arse backwards in debt makes me question those that did.

Another note. When the ban is lifted on short selling expect the market to fall like no other as the financial institutions will have been propped up by govn't movements that have nothing to do with their real value.
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Old 09-21-2008, 08:43 AM
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Originally Posted by ryan1234 View Post
Good luck to you....

I'm holding out till this short selling ban is up to put anymore into financials...hopefully there will be some good deals in a few weeks....We'll see what happens... hard to say exactly.... thinking about waiting til BAC drops to $25 +/- (hope it actually happens)
I don't know if you'll see $25 but it will get close. With the stock swap that's going on BAC will be releasing millions of more shares out to the open market. They won't be able to support paying the dividend on so many shares that they'll probably cut it by about 30%. The price will dive pretty hard. I purchased 20 OCT $30 put contracts at $2.57 so if it even approaches $30 I'll be back in the black on that investment.

Like you I'm out too. I cashed in my winnings and sitting this one out till the drop comes. My few options will stay put. I expect them to cut the div during their oct meeting which will probably put them back in play. If not then I'll just swallow the 5k and move on. When it drops I'll be going long on it myself as well. With the acquisition of MER the company is easily worth $50 once they emerge from all this. I'm sure we'll see a market drop or two if WM can't be sold.
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Old 09-21-2008, 08:48 AM
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Originally Posted by atpwannabe View Post
Frankly, I'd rather see some bailouts and more gov't control than to have the financial markets and the economy as a whole implode on its self.
It's just a false feeling that this helps the market. By stepping in the gov't is basically creating a "false inflation" on the value of all these financials. What happens when the bailout money dries up? What happens when the short ban is lifted? That inflation will be called into play and those stocks will dive back down to where they are and should be. Debt just doesn't disappear. They can move it all they want but it still exists. So when it dives back down now were up to 11.3 trillion in debt and even worse off.
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Old 09-21-2008, 09:40 AM
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Thoughts from people much more educated on the subject.


Many of the same economists and opinion-makers who'd provided a bipartisan sheen of consensus to Treasury Secretary Henry Paulson's previous moves have quickly begun casting doubts on the wisdom of a policy that would allow Treasury to purchase without oversight hundreds of billions of dollars of difficult-to-price assets from financial institutions.

Under the proposal, Paulson would not have to report to Congress until December, and the only safeguard for taxpayers was a provision that the “Secretary shall take into consideration means for — (1) providing stability or preventing disruption to the financial markets or banking system; and (2) protecting the taxpayer.”

Skepticism toward the plan reflected more than the predictable desires of the left to spread the wealth to Main Street or of the right to reject government bailouts, although those sentiments were also expressed.

Paul Krugman, the Princeton University economist and liberal columnist for The New York Times who had until now been cautiously supportive of Paulson's and Federal Reserve Chairman Ben Bernanke’s efforts to prop up the system, wrote that the new plan would be a taxpayer rip-off. “I hate to say this, but looking at the plan as leaked, I have to say no deal,” he wrote on his blog at 4:46 p.m. Saturday. “Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.”

President Bush is “asking for a huge amount of power,” said Nouriel Roubini, an economist at New York University who was among the first to predict the crisis. “He's saying, ‘Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.” (Roubini told the New York Times that despite these concerns, he also thought the plan could help stave off a recession.)

Yves Smith, a longtime banker and contributor to the influential finance blog Naked Capitalism, published an angry post there titled, "Why You Should Hate The Treasury Bailout Proposal":

"Given that continuing to buy U.S. assets will come under increasingly harsh scrutiny overseas, the U.S. needs to bend over backwards to devise a plan that at least looks credible in terms of directing the funds that come from taxpayers and lenders to their highest and best uses and implementing reforms that will restore active and prudent oversight of financial firms," she wrote. "The administration's demand for a free pass, even if Congress unwisely goes along, is likely to backfire with our foreign creditors."

Gregory Mankiw, a professor at Harvard University and a former chairman of Bush's Council of Economic Advisers who was the economic guru for Mitt Romney's campaign, favorably linked to Smith's post under the headline "A Blank Check" and approvingly quoted a correspondent who wrote, "Has more money ever been given with fewer restrictions on how it is used? Ever?"

Sebastian Mallaby, the center-right economic columnist for The Washington Post and scholar of the modern financial system, was equally dubious. “The plan is being marketed under false pretenses," he wrote in his Sunday column, rejecting comparisons of the plan to the Resolution Trust Corporation, which the government formed in response to the savings and loan crisis to purchase and sell off the bad loans made by bankrupted thrifts.

“The administration proposes to buy up bad loans before the lenders go bust,” Mallaby noted, keeping the banks alive but doing little to solve the problem infecting the markets. “Bad loans are weighing down the financial system precisely because private-sector experts can't determine their worth. The government would have no better handle on the problem.”

University of Chicago Graduate School of Business economist Luigi Zingales, in a short essay titled "Why Paulson Is Wrong" that was cited by Mallaby and a raft of other economics blogs across the ideological spectrum, wrote: "For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of a few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists."

Justin Fox, Time magazine's top financial writer and columnist, also worried about the lack of an upside for the taxpayer. "What I still can't figure out is how Treasury hopes to structure the bailout so there's at least a chance of getting a fair return on that risk-taking," he wrote on his blog.

"How on earth will these things be priced?" Portfolio's Felix Salmon asked about the bad debt Paulson plans to purchase. He also pointed out that Treasury would need to stock its office with bond-trading professionals. "All we know so far is that it's going to be set up as a reverse auction, but that raises more questions than it answers."

One notable proponent of the plan was The Financial Times' unsigned Lex column, which acknowledged the lack of oversight but mostly praised the plan:

"This bailout is necessary and the bill should be pushed through quickly. … Nor is the package necessarily a disaster for the taxpayer or the U.S. dollar. If the Treasury buys assets well, and confidence is restored, there is [a] chance that Mr. Paulson could win fund manager of the year."
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Old 09-21-2008, 02:43 PM
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Kind of like throwing good money after bad !
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