If they were to do that, then for every private citizen they bailed out many more could lose their shirts in the economic catastrophe that would stand a good chance of following. AIG isn't just some really big company; it's one of the cornerstones of this entire house of cards that's passing for a financial industry in this country.

Not to mention that the the whole thing about the gov't just giving this money away is a terrible piece of spin. It was a loan - and at a pretty hefty interest rate, too. Assuming the plan works, the citizens of the USA will get to keep their jobs and have their government make a little bit of profit (which is precisely the opposite of costing the taxpayers money) at the same time. Even if AIG does default on the loan, they have enough assets that the government will be able to get its money back should the company be liquidated. But the Fed has done a lot to try and cover its tail - that's presumably why they arranged the warrant* for 80% of the company as well as the right to suspend dividend payments to AIG shareholders.

*BTW - warrant merely means an option to buy. The Fed has not exercised this option, and I suspect that they don't want to exercise this option unless they absolutely have to.

Those who have lost or are about to lose their homes as a direct result of the greed of AIG, Fannie Mae, et al.

Enough to keep their homes or begin paying mortgages on new homes. Essentially a subsidy to match the difference between how much they can * afford * to pay to have a roof over their heads and how much they are actually paying.

Whatever hidey hole in the treasury they ninja'd the $78 billion that they are using to buy AIG.

In fact, just cancel the purchase of AIG and do this with those funds instead.

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A closer look:

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There was plenty of greed all the way from the top to the bottom. At the bottom, we had people buying more home than they could realistically afford. (Interest-only loans, flex pay loans where the principle goes up. WTF?) Up the chain, we had greedy idiots willing to lend them money and bigger, greedy idiots willing to buy the loans. It was a giant pyramid scheme imho.

A lot of us of us who have lived within our means are seriously peeved by the whole thing. I'm now stuck in a situation where either I have to bail out those greedy idiots or have the economy implode and take me with it. <spits on ground, turns, and shuffles away>

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I may have many faults, but being wrong ain't one of them. -- Jimmy Hoffa

While we're at it, I'd like to see a little heat for the folks who, in the name of things like equal opportunity and affordable housing, scuttled the effort to do something about sub-prime loan situation a few years back.

With half a trillion dollars worth of foreclosures to cover and probably quite a bit more just over the horizon, that'd most likely end up being a rather large bill.

And an even more obscenely large bailout for the banks and whatnot, too, since the money would ultimately be going straight to them. With no strings attached, at that. At least under the current plan the Fed is getting something in return.

Say it with me everyone:

Owning your own home is not a right.

It may be an ideal, it may be "The American Dream" (or the dream of those in any other country on this earth), but it is not a right.

It is not a right for an individual to by a 3,000 sq ft McMansion on an interest only, ballooning, adjustable rate, magic mortgage and then decide that when they can't afford it - I need to step in and make up their payment shortfall on a house they never should have been in in the first place. It is not a right of a person earning $8.00 and hour to buy a home with no down payment if they can barely afford the payment, but once the water heater breaks, their entire budget falls apart. It is their right to work to improve their financial position and employability to where they have enough income to buy a home. But if they never get there – I don’t owe them a home of their own.

I know we don't operate strictly under "let the buyer be ware" - but at some point people have to look out for themselves. The mortgage broker may have even made a sound recommendation at first. Then the person that bought the home decided they needed a new car and new furniture for the place, which are all new payments the lender didn't have to consider when they first approved the loan. And, well, my payment is only $1,000 a month – it’s supposed to go up some day, but I’m sure I’ll have the car and furniture paid off by then, and I’ll get a nice promotion too!

At some point the borrower has to push the plate away, get up from the table, and say, "I'm full". Lending is an all you can eat buffet from different restaurants. Many of the lenders underwriting requirements for a $10,000 - $50,000 loan just review payment history and stated income. If you have a long history of making timely payments and you say you make $100,000 a year - they believe you. They'll make that loan. What they don't have the resources for is to review tax returns and a cash flow analysis on every small request that comes in. If they did that, the public would be crying about unfair lending practices and higher rates due to the cost of doing business.

The unfortunate result of this is we end up bailing out the big boys, who no doubt made some huge mistakes along the way, and they should have devoted resources to getting tax returns and completing and actual cash flow analysis for large mortgages. The applicants also should have had to sign and initial that they understand the nature of the adjustable rate mortgage and that their payment can and will likely go up in the future. It stinks to do the bail out, but the failure of AIG and the like would end up costing taxpayers far more in the long run than the bail out will.

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Spock Jenkins of the Vulcan Jenkins'.

I have an issue with that.
I have always worked with a buffer in what I can afford to pay, and what I stretch myself out to. I see plenty of people at that margin, but this has pushed them over the edge.
So; I'm careful with my money, they are too, but they are getting bailed out, and my taxes go to them, and I get squeezed. In the meantime, my 401K is getting hammered.

I don't know what a good formula would be, but this seems to be happening more and more (at least with my experiences, I don't know if there's numbers). And; this is not just economic, we bail out people that didn't have the insurance that they may be required by law to have.

Individually; I can see plenty of situations where this has to be done, but it's just getting overwhelming to me.

So; keeping the underlying flow in-tact makes sense to me. I'm not a fan of the government taking anything over, but if it's an actual taking over the share of the company, then at least its not a blatent handout to the stockholders.

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Numbers are not case sensitive. (me)

This is exactly why Ron Paul should be nominated as president.

Lots of people are investing in silver as well as gold. Interesting to see where all this will end up. Light at the end of the tunnel or not things should be changed. Will they? Doubtful.

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"To live is the rarest thing in the world, most people merely exist." - Oscar Wilde

Let's not drift into politics here.

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I may have many faults, but being wrong ain't one of them. -- Jimmy Hoffa

It will end up with a lot of people losing their shirts in silver and gold when stability returns to the market place, sensible lending practices return to the mortgage industry, and home values stabilize. I'll give you a hint - when the last person in the world you would ever expect asks you how to set up an account to invest in gold, it's time to sell.

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Spock Jenkins of the Vulcan Jenkins'.

It's always nice to see perception outrank ideology. Was it Salvor Hardin or Hober Mallow who said, "Never let your sense of morals prevent you from doing what is right."

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If they can get you asking the wrong questions, they don't have to worry about the answers.

Agreed. Worst thing to do in a crisis is to panic but how long until stability resumes? It's not a matter of days or weeks.

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"To live is the rarest thing in the world, most people merely exist." - Oscar Wilde

Or likely, years.

It could take at least 8 years for America to recover from the previous 8 years.

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Why does buying a company, essentially attempting to artificially prop up the market and try to keep their campaign contributors rich, make you less uncomfortable than the idea of using the same money to try to prevent people with homes from becoming people who are homeless?

It seems like common sense. Someone uses all their money trying to keep their house, and fails. It ruins their credit, so they can't find another home.

Their only option then is an apartment, but no one wants to lease to them because their credit is bad.

The only way to even have a place to live, assuming you haven't already lost your job from all the days off you were taking trying to keep your house, is to move your family to a tiny box in an apartment complex in the ghetto where one of you is probably going to get shot before you learn how to survive there.

Yes, these people were living outside their means. But plenty of people who were living within their means are now way outside of them because of increased gas and grocery costs and the freefall the market is in. To suggest that everyone affected just had this coming and bailing them out is some kind of dangerous socialist ploy, as I've seen plenty of people suggest lately, is to me too heartless.

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The Dow passed its Jan 14, 2000 high (immediately before the dot compost) a month shy of two years ago, and has been more-or-less steadily climbing since. The S&P did the same a year and a half ago. The same indices are both currently well above where they were before this week's big fall.

That isn't to say that we've totally recovered, and we're certainly not in the clear, but it still only took 5 years to recover from the dot com bust and things haven't gotten anywhere near that bad yet.

Who's bought any companies? The government has assumed temporary control of Fannie and Freddie, and it has issued a loan with an (unexercised) option to buy to AIG, but I haven't heard of any purchases just yet.

$1 trillion. Paulson just announced the framework of a rescue plan, and that's how much is going to be involved. The treasury is essentially going to pull something to get a lot of the bad debt off the books of the major finanical instutitions.

According to what some of the congresscritters are saying, they were told last night we were just days away from a complete collapse of the whole *world* system.

Reading between the lines of what Chris Dodd, chairman of the Senate Banking Committee, said (and just look at how much money he's been getting from Fannie and Freddie over the past few years, BTW), they are indeed putting ideology on the back burner in the face of reality. They were pooping their little underoos last night in those meetings and the D's and R's got scared enough to work together. Well, I think it's best to say they are going to get out of the way and let those who have a clue about how to fix this mess do without interference from them.

I hear you Extravoice. What this is essentially is like some idiot maxing out all his credit cards with no means to pay even the minimum payment. Uncle Sugar Daddy just came in and wiped off that debt. He'll get to keep all the crap he bought that he couldn't afford.

If Sugar Daddy hadn't done that, well, bone up on what the Depression was like. Now, will the idiots that maxed out their plastic learn any lessons from this without having to feel the full pain of the consquences of their actions?

-Richard

Does the index take inflation into account?

Because "at the same level as 2000" may be meaningless if not.

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No, but you can adjust for inflation roughly enough by ticking back the time it took for each index to catch up to its early 2000 levels by a month or two.

I wonder if there's been any frantic calls to Alan Greenspan for advise?

Anyway, to sum up to see if I understand all this:
AIG is basically the insurance company for the financial institutions, ensuring that even if a bank goes belly-up peoples money are still safe.
Financial institutions didn't notice in time when the bubble would bust so made a lot of bad loans and as a result are circling the drain.
Since it's happening to all of the financial institutions the same time, AIG don't have enough money to cover for all of them, since that's not how insurance works (have all car owner crash at the same time and your car insurance would be worthless too).
The government is stepping in with a loan to AIG so then can prevent the banks from collapsing, so the people who actually saved money rather than borrowing more than they can afford won't lose their savings.

What I don't get is how this become taxpayers paying for bad loans?

It won't stop foreclosures on the bad loans, since that's basic damage control by the banks and they have to do that whether AIG gets money or not, what it will do is to make it just a little bit easier for the bank directors to keep the banks running than to take the big step to the pavement where they don't have to worry about how to pay their lenders.

Remember, in the depression you needed more than an umbrella to be safe when walking Wall Street

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‘To those who regard “crime fiction” as some sacred icon which must follow a rigid formula, I will always be the man who writes 18-syllable haiku.’Trying to make sense of computers, The Error Log.

That part I explained. *
That's part of what this is accomplishing, the other part is saving those people that would be wiped out if the institutions fail. Part of the AIG bailout involves pensions that are tied up in the mess.
How does that happen?** There's no profit going to them, they are essentially getting thier shares taken away from them.

*ETA... I really don't want to get into this. This is not the place for it. If I were able to sit in a room and discuss it, I would be happy to. But here...Let's agree to disagree.
**ETA... I'm refering to rich. Yes, they get some benefit, but rich is out of the question in my mind.

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Numbers are not case sensitive. (me)

Well, I'd argue that any politician who isn't making his campaign contributors rich is not doing his job. That's his sole purpose while in office. The "public servant" bit is extremely overplayed and impossible to believe.

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You know, there's some now saying he should've tried to cool down the lunacy during his tenure, and he was happpy with if not encouraging the drunken sailor spree as much anybody else. They'll be arguing over this and who deserves what share of the blame for years and years to come.

Well, that is isn't AIG so much as the huge plan Paulson and Co. came up with today, the "Mother of all Bailouts" as some are calling it. The US govt. is essentially going to buy up much of the bad debt due to those bad mortages.

While the accounting will be some complicated mess, essentially the govt. is taking the debt off the books of the banks and other outfits in trouble and putting it on the govt's books. Again, it's like someone running up his credit cards with no means to pay and the govt just says, don't worry you don't owe that any more, I'll take care of it for you.

About $1 trillion total when it's all said and done.

What they've done is truly unprecedented. It's mind boggling. And they had to do it. The world financial system would've imploded in just a few days if they hadn't done this (and other things like banning shorting of financial institution stocks).

THe enormity of what the US govt has done just hasn't sunk in yet. It's no stretch to say there is no free market anymore. The govt just stepped in with the biggest exercise of govt control ever. And it was a Republican administration that did it. Because it *had* to or there wouldn't be any market left, free or otherwise.

-Richard

What a mess...
My understanding of economics is very poor.

I cannot contribute any knowledge in this thread.

But what I can do- is ask some questions because...

I have no clue what this stuff means or what the repercussions are.

Apparently we are being taught by rote:

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As to housing prices - that's partially due to lending stupidity and partially due to supply and demand. Nothing says a particular commodity must always appreciate, especially one as overproduced as housing. On the bright side - in a year or two it'll be much easier for people to buy houses, rather than hold them as an investment.

As to the lending stupidity - if I hear "predatory lending" one more time, I'm going nuts. It should be "predatory borrowing". What are we to say about these people taking the loans? "Help! They can't do this to me! They're giving me $100,000 even though I'm a crappy risk because of the fair housing act. They contractually expect me to be willing and able to pay it back! This isn't fair! I'm signing on the dotted line! It's predatory I tell you!"

The banks didn't commit fraud at all. They were legally compelled to make stupid loans. The borrowers are the ones defaulting. There's a problem, but it's not with corporations or mortgage banks. The whole class warfare narrative really doesn't fit this scenario at all.

Bailing out the banks is problematic too. It saves everyones 401k who had invested in them, but it also produces a moral hazard in the banking industry. Now, irresponsible behavior by the banks is rewarded, and responsible behavior is no longer competitive.


PS - In a sane, capitalist banking system, people who didn't have stable and abundant enough income to be a good risk to repay a loan would be told "no". Then they couldn't go on to buy houses they couldn't afford at radically inflated prices because money grew on trees. It would be harsh, to those who can't stand the idea of a budget ceiling, but it would be solid.

Also, banks that like to live dangerously might be able to get higher interest rates, but they would also crash and burn with no one to help them. Investors would have incentive to invest in more conservative instututions (unless they also like to live dangerously).

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http://amssolarempire.blogspot.com

Re moral hazard. I just got through reading a bunch of stuff in the WSJ and some other online sources (the London papers go into much more detail than most of our own -- what does that tell us about their estimation of the public reading them? And they're probably right. )

The moral hazard is a key element to the Mother of All Bailouts. Paulson and Co. are going to take a very "command economy" move and set the price of something big by govt. fiat, rather than letting the market decide. The thing they will set the price on is the value of that bad debt. (The market, in free fall, has essentially said it's worthless. It's not really worthless, but as the balloon was deflating it was effectively in the short run). If they set it too high, we're in moral hazard territory big time. If they set it too low, then the balloon deflates too much and Main Street is in trouble.

They're going to have to set it at value that hurts enough to teach the moral lesson, or at least not have that lesson lost, but no more or less. As some wag I was reading put it, they'll consume wads, or say they're doing so, of computer cycles cranking some ridiculously complex algorithm trying to estimate a value. While that's cranking, they'll wet a finger from the one hand and stick it up in the wind (and grease a finger from the other hand and stick it somewhere else) and pull a number out and say it was the complex algorithm that did it so it's a good number.

Who is the "they" that is going to do all this, you wonder? Well, I was reading about this. I hate to sound like a broken record, but I want to stress this is the biggest "makeover" of our financial system since the 1930s -- even bigger. That's not a stretch. The ones who are doing are a small handful of men most people outside of financial wonk circles have never heard of.

Paulson and Bernacke are two of the most familiar. There's some honcho dude in London in on it. The rest of the handful are just insiders.

And that bunch is going to rewrite the books, restructure the entire world financial system over the next few days and weeks. And they're doing it under extreme pressure with no second chances, no second opinions. Decisions that involve trillions of dollars and will affect the system for years to come are being made on the fly by this small group of characters. Nobody in Congress understands much of it all, they'll just vote on whatever they come up with.

How do you like them apples? For instance, one of this group, some big titan of Wall Street was running around from meeting to meeting with all the others trying to save the system and then got a call that his own company was soon going to go down the tubes. So he had to multitask saving the world with he saving his own rear end.

From reading all that, I get the feeling it was like a little stunt a friend and I pulled when I was a teenager. We were playing with fire, literally. Our little play fire took a turn for the worst and was going to get out of hand in about 10 seconds if we didn't get it out. We did, but boy I could've burned down the whole shebang there.

That taught me a lesson (don't play with fire). And then we had to cover up what we'd done. Was only mildly successful there.

Anyway, from reading some of these accounts, I imagine Paulson and this bunch of insiders were feeling just like I was back then.

-Richard

Someone once said that war is nature's way of forcing us to learn geography.

Apparently, this type of situation is nature's way of teaching us economics.

I'd rather read about both from books.

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I may have many faults, but being wrong ain't one of them. -- Jimmy Hoffa

Bailing out the stupid from the consequences of their stupidity doesn't do any good. It just encourages more of the same kind of stupidity by taking away the risk, thus asking for more of the same consequences later.