Tue
Sep 16 2008
08:43 pm
The Financial Meltdown of 2008 Deepens
By: Brian A.

The Wall Street Journal is reporting a $85 billion government rescue plan is in the works for AIG:

The U.S government is close to an emergency rescue of American International Group Inc. -- one of the world's biggest insurers -- signaling the intensity of its concerns about the danger a collapse could pose to the financial system.

The decision to provide a federal backstop for AIG came Tuesday as the federal government concluded it would be "catastrophic" to allow AIG to fail, according to a person familiar with the matter. Federal officials had tried to get the private sector to pony up funds during a three-day meeting in New York over the weekend.

But those efforts failed and with no private sector support forthcoming, Federal Reserve Chairman Ben Bernanke, Federal Reserve Bank of New York President Timothy Geithner and Treasury Secretary Henry Paulson concluded that federal assistance would be necessary to avert an AIG bankruptcy, which they feared would have disastrous repercussions throughout the financial markets.

Extraordinary measures are being taken during these extraordinary times. Apparently, concerns about "moral hazard" are being abandoned in the face of catastrophe. I hope this gamble succeeds, but I suspect more trouble lies ahead.

UPDATE: Deal announced.

Topics:
bizgrrl's picture

"The U.S. government will

Submitted by bizgrrl on Wed, 2008/09/17 - 6:16am.

"The U.S. government will receive a 79.9 percent equity interest in AIG"

Since when does the US government take majority stock ownership in a company?

MDB's picture

Since when does the US

Submitted by MDB on Wed, 2008/09/17 - 7:06am.

Since when does the US government take majority stock ownership in a company?

Well, its not the US gov't, but the Russian government did a lot of that around 1919...

bizgrrl's picture

From Digby: You know, if

Submitted by bizgrrl on Wed, 2008/09/17 - 8:03am.

From Digby:

You know, if this was Bolivia, the State Department would put out a strong statement declaiming the nationalization of industry and the stifling of private enterprise. But of course, in this case, industry made horrible decisions, so that justifies the Communism. It's unclear to me that it's even legal for the government to structure this absent legislation, but we're in a brave new world.

RayCapps's picture

I'm floored...

Submitted by RayCapps on Wed, 2008/09/17 - 8:50am.

This has got to be unconstitutional, right? Can we really nationalize - for lack of a better term - a private business? Even with congressional legislation supporting this act, I don't know how it could possibly pass muster. GW has outdone himself.

Andy Axel's picture

The chopping noise that you

Submitted by Andy Axel on Wed, 2008/09/17 - 9:28am.

The chopping noise that you hear is Milton Friedman's helicopter, and Bernanke is showering Wall Street with bales of printed greenbacks. Your fiscal conservatives on parade, l's & g's.

This has got to be unconstitutional, right?

That's for the Roberts/Scalia/Alito/Thomas axis to decide. Where do they have their retirement funds stashed?

Can we really nationalize - for lack of a better term - a private business?

We're toting the vig for the Bear Stearns/JPMC deal, we're absorbing the debts of Fannie/Freddie to the tune of $5T, and now AIG. (Who'd Lehman piss off, anyway? So much for setting an example.)

The bare truth: There has always been a very powerful, interventionist state supporting the activities of these supposedly laissez-faire businesses, and when the shit hits the fan, there is no such thing as "moral hazard" to them. (Absent morality, where's the hazard?)

____________________________

the distance between black & white is much further than i would like until now i never noticed that fascism has many disguises -d. boon, 1981

RayCapps's picture

The thing about AIG...

Submitted by RayCapps on Wed, 2008/09/17 - 9:51am.

that's breaking new ground is that it seems to reflect actual ownership by the Federal Government of a formerly private firm. Fannie/Freddie were basically set up by the government and that's always been a weird relationship, not all that terribly different in theory from TVA. Government loans and government assumption of outstanding debt and the like has a history, too. That's not to say I approve of any of this, just that it's not exactly new ground.

However, for the United States of America to become majority owner of a formerly private firm is astonishing (to me, anyway). Are we going to send a cabinet level officer down to sit on AIG's board of directors? If AIG turns a profit someday, do I - as part owner - get a dividend? When GM finally gets ready to cash it in and file for Chapter 11, do we get into the car making business? This is bizarre. We've sure come a long way from the Chrysler bailout, and in such a short time.

reform4's picture

I recall another takeover...

Submitted by reform4 on Wed, 2008/09/17 - 9:04am.

I think back in the 1970s, the government took over a failing regional railroad (important to the economic health of the region), and formed Conrail. The federal government operated Conrail, got it back on its feet, and sold Conrail back to public investors at a profit to taxpayers.

Of course, the GOP nay-sayers called it "ConFail" and said the government couldn't do a better job than the private sector. They also said Clinton's 1993-1994 tax changes would destroy the country. Why anyone listens to conservative economists anymore is beyond my realm of understanding. Now they're just sliding into hypocrisy.

Funny, we can spend $85 billion to bail out a bunch of folks that took home multi-million dollar bonuses, but we can't pass one law to give Joe and Marge 60 more days to avoid foreclosure and homelessness.

We have become a nation of economic cannibals.

RayCapps's picture

I'd forgotten Conrail...

Submitted by RayCapps on Wed, 2008/09/17 - 10:11am.

I was still a grade schooler back then. However, ConRail was yet another government greated corporation (ala Fannie/Freddie/TVA) that purchased the assets of several failing/bankrupt railroad companies in the Northeast. It's still not exactly the same thing as what appears to have happened here. They're not even trying to create a shadow company to stand in place of the United States Government. This is a direct assumption of ownership by the government itself, no intermidiaries.

The Federal Reserve Bank of New York is straight up buying 79.9% of AIG for $85 billion. The Federal Reserve Bank of New York has supervisory and regulatory powers - it is a functioning arm of the government, not a government shadow corporation. If this is allowed to stand, it will appear to empower the Executive Branch of the United States Government - on its own authority - to utilize the Commerce Clause of the United States Constitution to nationalize the whole economy - make us a literal socialist state. UN-FREAKING-BELIEVABLE.

bizgrrl's picture

Ouch! DOW down 449 today.

Submitted by bizgrrl on Wed, 2008/09/17 - 7:16pm.

Ouch! DOW down 449 today. Down over 800 in three days.

Hammersmith's picture

Take overs and bailouts....

Submitted by Hammersmith on Thu, 2008/09/18 - 2:10am.

People on this and similar sites are always talking about fascism, often erroneously. Now this IS fascism.

WhitesCreek's picture

NO it's not...This is the

Submitted by WhitesCreek on Thu, 2008/09/18 - 6:34am.

NO it's not...This is the result of fascism's failure.

This is closer to socialism.

gonzone's picture

Exactly

Submitted by gonzone on Thu, 2008/09/18 - 8:40am.

When times are hard all corporatists (aka fascists, ask Mussolini) become socialists!!

Privatize profit, socialize risk.

"When the going gets weird, the weird turn pro."
Hunter S. Thompson

Hammersmith's picture

You should...

Submitted by Hammersmith on Thu, 2008/09/18 - 7:46pm.

better inform yourself about what fascism is--the corporate state. It would be socialism if it were being done in Sweden for example, but America is a military (industrial complex)-police state rapidly moving toward a full-fledged fascism. Look at Americans' obsession with patriotism and religion--this is not a 21st century modern industrial state, much less a liberal (small "l") democracy. Socialism? You can for get that.

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