Bail-out or bust?

AIG could be the next casualty of the credit crisis, unless the authorities step in

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The neo-cons have run America's economy into the ground! Government bailouts won't help won't solve America's current financial crisis. If we don't get our fiscal house in order, all bailouts will do is buy a little time. In my opinion, The European Union needs to take responsibility for its own defense. How many billions of dollars would that save America? Of course, Europe would be forced to face Russia by itself. Many Americans, like myself, are tired of defending 'an empire'. We can't even defend our own southern border against a wave of illegal immigrants, how can we defend the rest of the world?


Dear nihilism

UBS and HBOS are quite capable of understanding what they have got themselves into. I'm a tad more concerned about the minnows (and yes, there are still quite a few minnows who didn't 'globalise'). The snag is that much European ex UK banking might not understand that they were bottom feeders.


in light of nihilism-

what i am talking about is similar to one component of the federal reserve (the discount window) but the discount window is only open to (and I believe funded by) depository banks. right now it has temporarily been opened up to investment banks, but those guys are basically borrowing money that is on deposit with the Fed from other institutions. i'm just saying that if these new guys are now going to be borrowing money from the fed, they need to be posting their own deposits with the fed. but i'd really like to have a separate fund--not the discount window--that only dealt with derivative-related risks since those are different assets from what your traditional bank holds.

in light of nihilism

Dear Perugina,Of course it will. I'm not certain, but I think UBS and HBOS could be in trouble. The inter bank market has completely frozen again, don't worry, nothing real is permanent.

in light of nihilism

Dear Luke Skywalker,That would have to be an enormous fund, but I thought America already had this set up, you know, The Federal Reserve.Regards,


It is predominantly the CDS held by (exUK) European banks which worry me. I have the notion that those arguably naive banks (not only banks) think their CDS are 'insured' (by AIG?). I don't know whether my asumption that the perception that the risk is 'insured' is correct, or even whether AIG is the insurer.

Could AIG failing effectively export even more trouble to continental Europe?


Sunday evening, I call an old friend of mine, a leasing agent dealing in commercial real estate in Lower Manhattan; the purpose of the call was actually to inquire after his wife's health (as she recently had an operation), not "business talk".

But he misunderstands the purpose of my call and, when I ask, "How are you doing?", he blows up on me: "First, Bear [expletive] Stearns; now, Lehman [expletive] Brothers. Who's [expletive] next?!?"

Thus, to paraphrase Hamlet:

THAT is the question: Who's [expletive] next?


"19th century railroads went bankrupt often and then their assets (ie track, rail stock) were purchased by healthy railroads." An intersting parallel because most of those railroads were corrupt corporations which enjoyed political privileges, just like the financial mafia, sorry, banking industry, does.


I think people overestimate the risk from letting AIG go bust. It is technically solvent except that it needs to post collateral on those MBS insurance contracts and other derivatives. I'm still of the opinion that the Fed should let it go under. All of the worst fears associated with Lehman going under proved to be wrong...the CDS markets didn't collapse, and the world kept going.

That said, I don't have the inside info that the Fed has. I will say this though...if the Fed decides that it has to make any sort of loan to AIG, that loan should be paid for by a tax on Wall Street profits for the next several years, and the govt should be guaranteed a healthy risk-adjusted return. Such a loan would, after all, primarily benefit the other Wall Street firms who have refused to pony up the cash to help AIG, even though a bankruptcy would be expected to affect them the most as their MBS holdings would lose value and lead to additional write-downs.

In the future, regardless of what happens now, I think Congress needs to pass legislation calling for some sort of "systemic insurance / bail-out fund" to be administered by the Fed, and funded PRIVATELY by all Wall Street firms that want the right to trade in derivatives. These firms are recklessly imposing systemic risks on the rest of us and we end up bearing the cost. If that fund were in existence today, AIG wouldn't be out begging JPM and GS for cash so that they could post additional collateral. I also think there is a huge issue with the fact that the notional amount of Credit Default Swaps massively exceeds the face value of the underlying bonds. It is basically just legalized gambling at that point...

in light of nihilism

Dear Perugina,If the contagion spreads to London then the Bank of England is doomed. Sterling is not a reserve currency, and the BoE does not have the scale to mount massive 'rescues'. My brother works in the BoE.If the Dollar does eventually go south, I think Europe will evoke an old economic strategy called 'Fortress Europe' and spice things up with a negative interest rate for foreign holdings of the Euro, to protect the currency. The Swiss will do like wise. The French will be indifferent to retaliation, since most of our economic competitors will have been hammered by the Dollar collapse. They'll need the Euro to stage a recovery.The French will howl for this, and they'll get there way, because it's what best for Europe.This article is a joke, a year ago AIG was dead meat, but has limped on because the American establishment wants to stagger the crises so as to thwart a run on the Dollar.


One interesting thing here, that points to a major historic shift, is that THE FED has no more credibility in the market. Nobody believes that the authorities can safely steer us away from danger. What this means for the next president? That the US dollar is dead. Fasten your seatbelt and put your seat in the upright position, for the winds of hyperinflation are coming.


RebelRasta, I agree on all but one point. I work in a major American Financial Institution with with 3 African Americans, 2 asians and at least half of those workers here are female. Racisim & sexism may be everywhere, but the ability to generate revenue seems to trump those. Perhaps greed has a silver lining?

Andover Chick

Let AIG fail. Then the vultures can pick thru its carcass. 19th century railroads went bankrupt often and then their assets (ie track, rail stock) were purchased by healthy railroads.

Juan A. Hervada

OK, no rate cut, no bail out. Market upwards by 1.57% at this hour (40 min to 4 pm). Maybe some modest selling now and then, the hard reckoning.The crash risk remains, but its probability is shrinking by the hour.


It is more than hard to contain one's incredulity in face of observing the utter naivety of market participants upon reading, "on Tuesday markets around the world tumbled after two ratings agencies, Moody’s and Standards & Poor’s, cut AIG’s credit rating. That decision forced the insurer to seek at least $13 billion in extra collateral to back its credit derivatives." How in the world can ratings agencies, whose blatant incompetence was exposed time and again, still wield this kind of influence? Basically, ever since the Enron debacle and certainly in the light of the mess of subprime ratings, which didn't even remotely reflect on the true value of the underlying instruments, even the most ardent defenders of the current regime must have been warned of the ease with which ratings agencies can be short-circuited by boards bent on hiding a company's true situation.If anything, then one of the paramount steps should be to set up a new regulatory regime not relying on ephemerous three-letter-codes subject to virtually haphazard revision within hours.


If AIG falls then the whole world will be in pain, since AIG is such a giant. Hopefully, that will not happen. This whole financial mess is shameful and disgraceful. But in a way it is poetic justice. All these companies are now tumbling because they participated in ganging-up on the poor via sub-prime mortgages. This is what happens when people go out of their way to take advantage of the poor and marginalized. So what was a plan that was designed to make the poor even poorer has backfired and is pulling all the participants down into a hole one by one. I hope the entire world will get the moral of this story, that we should do what we can to help the poor and not prey upon the poor. The solution to most of the problems in this world is simply to do all we can for the poor and marginalized. Once we start doing that the world will be a better place.Greed and glut drives most businesses these days. Gone are the days when a business does what is right and ethical and charges are fair and reasonable price. And let us not forget too about the practices of these companies to recruit color (Caucasian men) over talent. Yes, America's financial institutions are still some of the most racist and sexist institutions in the world. They all have glass ceilings when it comes to women and minorities. All these things need to be corrected going forward. We all have choices in this world. We can either be fair and reasonable in our dealings or can pursue unreasonable and unfair practices then face these kinds of consequences. Businesses all over the world need to be more reasonable and more humane. They have become accustomed to making super-profits and must indulge in greed and unethical practices in order to maintain them. They do it in our name (shareholders and investors). So it's also time for self-check.Good luck to AIG. Good luck to us all. One love. RebelRasta


What ever happened to the idea of responsibility?I think that we can learn a serious lesson from the fall out, who are these people risking all and being paid handsomely? Who decided that a good strategy would be to risk everything for short-term profitability? Why is the outlook of a company to increase share-price while forsaking long-term profitability?There again if I was paid a stupid amount of money to send a company bankrupt... I may be tempted?


How great is the exposure of the European banks to a possible failure of AIG? The US commentators seem to be using the same special pleading for aid for AIG which they used for Freddie and Fannie - implying that any financial support is a necessary diplomatic measure.



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