I think we need to be a little careful in the words we use to describe the events that have unfolded with the demise of AIG (American International Group). I’m also very conflicted in how I see the US government’s actions as I almost always prefer strictly hands off approach that most of us libertarians prefer. AIG is a huge firm and was involved in a host of things that goes to the core of Main Street. A disorderly liquidation could have proved even more disastrous without the “intervention”.
Rightfully so, in my opinion, the Fed was greatly concerned with the mess the liquidation would cause to the financial system and they took action.
The terms the US Fed extracted from AIG were absolutely punishing. AIG is borrowing the money at 850 basis points over Libor (3.3%). Importantly the FED ranks ahead of all the other creditors which means the the Fed has first bight at the money cherry. The Fed has also forced out senior management and installed its own people. Both Morgan Stanley and Goldman Sachs are the Fed’s advisors and I presume their representatives are acting as temporary management.
I would call this action something else- perhaps a punishing intervention, but I certainly wouldn’t call it a bailout in the traditional sense. It appears to me that the US taxpayers done a great deal. The Fed ranks first and the receives a 10% margin over Fed funds (2%) and there is a great betting chance they get all their money back plus the huge spread.
Loan Sharks would be salivating at the deal in the back streets alleys of Brooklyn.
Perhaps…… It definitely was sex but the Fed seems to have used a condom.
Right now Morgan Stanley and Goldman Sach’s stock is down 45% and 25% respectively (on the day). This after they both reported profitable quarters with Morgan Stanley beating street estimates. What does this mean? It means to me that we are seeing the end of Glass Steagall– the enormously stupid regulation going back to the 30’s that separated stock broking business from regular banking that was finally repealed in the late 90’s. It looks like these two firms won’t survive in the present structure and are likely to be merged with commenrcial banks. I guess the Macquarie model is also gone.