Tuesday, November 11, 2008

BUYING WALL STREET'S BULLSHIT (AND ITS SHITTY BALANCE SHEET), ONE STINKING LOAD AT A TIME

More on the AIG Bailout, Version 3.0. A solid post from Naked Capitalism, explaining just what a disgraceful boondoggle this third bite at the apple is. A few highlights:
The loan was ALREADY collaterallized by ALL the assets. So despite the form of the transaction, the Fed is simply lending more money against the same pool of collateral.

Now given AIG's liquidity needs, and the object of this exercise (not to have AIG go under) the second loan was presumably necessary, but the efforts to dress it up as as a loan against collateral is an amusing fiction (all this second loan does is degrade the collateral against the original loan. There are no free lunches here, except, of course, for AIG). Again, if we go back to the felon metaphor, the state had budgeted X for his care, but it turns out he has a really nasty disease that really has to be treated or it will infect the entire prison population and the guards too, so the cost of his incarceration has gone from X to X + Y.

But now we get to the heinous part. AIG should have no rights at this point. Zero. Zip. Nada. The government already on the hook for an open-ended liability. Yet the Fed is treating AIG as a party that has rights and is negotiating with them, as opposed to dictating terms.

* * *
And lo and behold, the Treasury is going to buy crap assets at amazing prices:
Under the terms being finalized on Sunday night, the government would replace its original $85 billion loan with a two-year duration with a $60 billion loan with a five-year duration. Interest on the loan would drop from 8.5% plus three-month Libor interest-rate benchmark to 3% plus Libor. (Libor, the London interbank offered rate, is a common short-term benchmark.)
We aren't to the dud asset part yet, but behold the nonsense. AIG gets a 5 year term, up from two, and a massive gift in the form of a 5% reduction in its rate of interest. A complete gimmie.

Every mortgage borrower in America whose bank has gotten any money from the TARP should write their Congressman asking to know why they aren't getting a their interest rate reduced by nearly half. Ah, but I forget. Your bankruptcy, sadly, does not pose a threat to the financial system.

* * *
But the worst is that not only was the initial AIG de facto bankruptcy a case of looting, the government has now decided to aid and abet AIG management in further looting. What pro-taxpayer purpose is there in the improvement of terms above? None. As we pointed out, there were only a couple of reasons for easing up on AIG, and they could have been provided for with minor changes that would not leave the taxpayer materially worse off. Instead, major concessions have been made to AIG, all to the detriment of the taxpayer. AIG management now has job security for five years (and AIG top brass is very well paid) and better odds of salvaging something for themselves when the five years are up thanks to the government giving them an unwarranted subsidy.

When the TARP was announced, we called it "Mussolini-Style Corporatism in Action." Sadly, it looks as if events are panning out as foretold.
Ignore this stuff at your peril, folks. It matters big picture (the future of America's economy, its democracy, its moral center) as well as small picture (what the hell are you gonna do with your savings, or lack thereof, in the face of enormous debt, price & asset deflation in the short term, and scary-as-hell inflation in the mid-to-long term). It's not funny, it doesn't really lend itself to snark, and it requires reading beneath the surface of mainstream press coverage, and listening miles below what both parties are peddling from DC.

But it matters, yet most Americans don't wanna think about it.

Bad idea.

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2 Comments:

Anonymous applesaucer said...

Great post. Keep it up.

Financial sector issues are THE issues of the day; if you don't understand them, then you don't understand anything.

Sadly, for a variety of reasons, most of us don't understand them. This is why the financial sector has an open door through both political parties to steal so much from the rest of us.

The magnitude of the theft is so shocking and in-your-face that it could only happen to a people living in nearly-total financial ignorance.

Applesaucer

8:04 AM  
Blogger DED said...

We still have 2 months of Paulson left. There's still plenty of damage he can do.

I can't help but think that, although he's been all smiles to Obama, W is ordering his henchmen to "poison the well" on their way out.

8:12 PM  

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