Moral hazard and the AIG bail out

Moral hazard and the AIG bail out

--.com

What is being ignored here is that as the insurer of the debt behind the disaster, it was AIG that set the criteria for the loans

(visit the link for the full news article)

Good article that makes the point that we are not having explained-AIG generally dictated the terms of loans to banks-for massive profit-we now will bail them out.

--.com
(visit the link for the full news article)

These corporates all encourage a culture of stupidity-and now personally I hope more of them collapse-rumour has it that the HSBC might be one of the next-another grossly irresponsible player.

reply to post by Rinorino2



Could someone makes "sense" of this for me - if a company was doing well and just flat out booming, we would cry fowl if the government decided to step in and take it over - socialize it, right? And yet, we step in and take over "busting" companies. Why do we only socialize the failures? It's rediculous. Socialize none of it. Let them live and die by their own wretched bad decisions.

reply to post by Ron Paul Girl


Thers your answer-they underwrite their success, we underwrite their failure-its win win for the corporates.
Bizarre indeed-don't see anyone at AIG complaining about nationalization of private enterprise today!

Originally posted by Ron Paul Girl
Could someone makes "sense" of this for me - if a company was doing well and just flat out booming, we would cry fowl if the government decided to step in and take it over - socialize it, right? And yet, we step in and take over "busting" companies. Why do we only socialize the failures? It's rediculous. Socialize none of it. Let them live and die by their own wretched bad decisions.

It is far from RIDICULOUS. A company failing doesn't damage the owners of the company nearly as much as it damages the average american, the average stock holders, and other businesses. We don't step in when a company is booming is because it would only negatively effect the market and stock holders.

We step in when company's like AIG are about to collapse because it is essential for the economy to survive. Two days ago they flat out refused to help AIG out. On monday Lehman Brothers, an investment bank, collapsed. This completely changed the situation. If AIG failed to secure any loan, they would engage in a fire sale to raise capital, or flat out declare bankruptcy. The largest insurer in the world and an investment bank going bankrupt in the sale week would do unimaginable damage to our market, the world market, and the people of the united states.

By giving this loan to AIG, we actually just saved people that had investments in AIG ALOT of money. Many people would have lost alot of money if the Fed hadn't stepped in. Furthermore, this is how it actually works.

AIG is a solvent company, so they have the ability to raise capital. The problem was they didn't have enough time to sell it at reasonable prices to rasie that capital. They would engage in a fire sale, in which stock holders would lose so much money, or worse they would declare bankruptcy.

Now, the fed doesn't have stock in AIG, they have warrants. This mean that they can take the warrants and if they decide to act on them, the warrants will convert into 80% ownership. They will only act on them if AIG fails to meet the agreement that was made between the Fed and AIG to repay the loan made. If they fail to do what they agreed to, we will lose some money, but this is significantly less damaging to everyone than letting the company go bankrupt.

Should AIG follow the agreement, over the next two year the taxpayer will MAKE MONEY off of this. We will get our 85 billion back, plus interest. That is how this could turn out to be beneficial for the taxpayer.

Originally posted by Rinorino2
Thers your answer-they underwrite their success, we underwrite their failure-its win win for the corporates.
Bizarre indeed-don't see anyone at AIG complaining about nationalization of private enterprise today!

That is because it wasn't nationalized. The fed received warrants. If AIG meets its end of the bargin, we get out money back and some and AIG comes out ok. It is only if they fail to meet their end that the government takes over the company and we protect ourselves from losing the full 85 billion we lent them.

Its basically a protection from a few people at AIG running off with the cash and leaving stockholders and taxpayers to pay for it.

Originally posted by Rinorino2
These corporates all encourage a culture of stupidity-and now personally I hope more of them collapse-rumour has it that the HSBC might be one of the next-another grossly irresponsible player.

I hope everyone realizes, that these companies were still making millions of dollars, and the only reason they are going under is because of mark to market accounting, which frankly is ridiculous. No one knows the market price, so everyone is marking these items on the balance sheet to like 10 cents on the dollar, which just builds on itself. These companies were doing fine...none of these companies would have gone under if we didn't have mark to market.

reply to post by grimreaper797


My opinion, your painting lipstick on the pig.
The warrants arrangment is a way of sugar-coating a big fat gift.
When AIG can't repay-the amount remaining will be waived outright.
This is a con. And its wrong-it would be better AIG collapse.

Originally posted by Rinorino2
My opinion, your painting lipstick on the pig.
The warrants arrangment is a way of sugar-coating a big fat gift.
When AIG can't repay-the amount remaining will be waived outright.
This is a con. And its wrong-it would be better AIG collapse.

Um, no it isn't. The warrant is specifically made to STOP AIG from screwing everyone out of their money, either accidently or intentionally. The remaining doesn't get "waived outright". When AIG can't repay, the government takes over, and stops the possibility of the company bankrupting. It will also prevent all these stockholders from getting screwed. The government will take over and AIG will be brought to a slow bankruptcy where all the assets get sold at a reasonable price over time and people don't get royally screwed.

Let AIG collapse. Do you have ANY idea what would happen if AIG collapsed. Forget about all the stockholders it would screw and just tell me what you think would have happened if AIG collapsed.

Originally posted by Rinorino2
reply to post by grimreaper797

 

My opinion, your painting lipstick on the pig.
The warrants arrangment is a way of sugar-coating a big fat gift.
When AIG can't repay-the amount remaining will be waived outright.
This is a con. And its wrong-it would be better AIG collapse.

Hey, hey now!

Say what you will about the economy, but leave sexist remarks out of it, please.

Wheres the Moderator when we need him.........................


Just being a thorn in your side....ha ha

reply to post by grimreaper797


Thats today's arrangment, and it can and will change-when the spotlight is turned away.
Ultimately it's buyer beware-and that applies to the millions who have policies with AIG-so what if they get screwed-why is that my problem.
They chose to trust AIG-the government never backed their investment-or purported to.
I think I do understand the impications of AIG collapsing-an almost complete freeze of much of credit worldwide-leading to a market collapse for lack of finance-bring it on!
Let companies and individuals buy things they really want with money thats really theirs-not easy credit.
I worked in the finance and banking sectors at managerial level-and the greed, laziness and stupidity makes me and made me sick.
I agree yours is the psoitive constructive opinion-mine is the bitter, destructive one-so what-I am sick of living in society full of fakers pretending to be what they arent, the whole 'keping up with the joneses' thing and wouldnt mind it all going to sh-t.
Not that I actually think it will.


[edit on 18-9-2008 by Rinorino2]

So if AIG did collapse, then the stockholders, etc. would be screwed, but how many working wo/men own shares in these corporations? I bet I could ask all 66,000 working people in my city, and not one owns a stock in AIG or any other group who may be going down the toilet. So who is really getting screwed here if it did collapse?, the rich, or the average working Joe Schmo?

Government is bailing them out in the short term.
Of course they cant repay the government.
But European firms are eying there foreign assets.
So hopefully they will purchase them and repay the government.

To understand the ripple effect of an AIG bankruptcy you would have to understand to whom AIG owes money since they would get pennies on the dollar.

First would be a substantial number of the insured in the US and throughout the world who need to file claims with AIG. The insurance policies they hold might well become worthless. This would be a disaster to thousands and perhaps millions of individuals and business throughout the US. E.g. imagine that you now no longer have life insurance, and if you are older or sick it may be impossible to reinsure.

Since they also insure various credit obligations via swaps, those positions that are taken become worthless causing a cascade effect for all the debt so insured. It would probably destroy a substantial amount of the all the credit offered in the US. That is many banks and other lenders might not be able to lend to business and individuals.

Then there are all the people who have annuities with the company. Those assets would be doled out to the biggest credit holders. The ripple effect would be far reaching. It would be devastating to the economy.

However having said all that, the only way to save the economy for the long term might be to destroy it in the short term and remove all the dead wood and inefficient business that are unable to make money. The downside to this is that those with money (usually large monopolies) are able to grow their monopolies as an outcome of this. In theory the fed.s should apply antitrust laws to prevent this, but they are too busy serving these monopolies anyway.

Originally posted by Rinorino2
I think I do understand the impications of AIG collapsing-an almost complete freeze of much of credit worldwide-leading to a market collapse for lack of finance-bring it on!

That is the only part I quote because it is the only part that needs quoting. You are rooting for a market collapse. This is an attitude I am not going to argue with. You want nothing but negative things to happen to this country and its economy. As a result, you also wish negative things to happen to the people of this country and the people we care about around us. You do so because "you are sick of fakers". That's nice, but I don't give a damn what you are sick of. The well being of this country, its economy, and its citizens, are what is important, not what you are sick of.

I fully support the actions of the Fed because I am more concerned with the economy, the country, and the people around me, than having your pessimistic world view fulfilled.

reply to post by PontiacWarrior


Exactly-these 'ordinary mum and dad investors' are not all that ordinary-they are basically the well-to-do. Any one that takes out a life insurance policy knows well that if the insurer goes bust they lose the policy.
The public should never be forced to bail out reckless, greedy and badly-run corporates.
Make no mistake about the poor are being asked to bail out the rich-including customers.

Originally posted by PontiacWarrior
So if AIG did collapse, then the stockholders, etc. would be screwed, but how many working wo/men own shares in these corporations? I bet I could ask all 66,000 working people in my city, and not one owns a stock in AIG or any other group who may be going down the toilet. So who is really getting screwed here if it did collapse?, the rich, or the average working Joe Schmo?

The Fed now would stop the stockholders from getting screwed like you suggest. And MANY small stock owners are invested in AIG. AIG was a solid choice to invest in for a long time, so you can easily assume that people who were doing long term investing figured it was a safe bet. They probably lost a very good amount as a result of this, but they didn't lose everything.

The working joe schmo is the one impacted. These big time business men just move on to new things. They have the money to live alright. Its the regular stock holder and anyone else tied to the company that get screwed. AIG being the largest insurer, has many people tied to them.

reply to post by SevenThunders


I starred your post since I overwhelmingly agreed with it up to about the last paragraph. AIG is potentially just going through a prolonged bankruptcy. Rather than have it go bankrupt tomorrow or engage in a fire sale, the Fed is giving it the time it needs to sell assets and raise capital since it is still a solvent company.

AIG may very well recover, and I think its definately worth investing in if you have the money to do so, but it is entirely possible that it will just slowly go bankrupt over time. If it does recover then it isn't really dead wood, as you said. Given the situation though, it was necessary.

They let some of the dead wood go (Lehman Brothers) but the problem was the timing. AIG was too big to fall so fast and so close. You already know this though as you are one of the few on here who has displayed an obvious grasp of the situation.