What, you say? AIG and what Asteroid? Well, using my friend Jeff Brown’s analogy (read it here), today has sort of played out like a horror movie. The world was coming to an end (at least the financial world was). We were teetering on the brink of financial armageddon and wondering if the markets were going to do a total meltdown (as opposed to the sunburn it got on Monday).
Our stars, Super Hank and Bountiful Bernie, at first said that it was Mission Impossible and they couldn’t save the world (cue the Video below)
[youtube=http://www.youtube.com/watch?v=k55NuWQCh78]
But as is the case in all good suspense movies, the good guys decided that even if they were going to get their clothes dirty, maybe even get hurt a little, it was much preferable compared to the world coming to an end.
[youtube=http://www.youtube.com/watch?v=SCJeR0UebR8&feature=related]
So what’s this all about? It’s what the Fed and the Treasury did today. Late tonight, they came out with a “bailout” plan that will save AIG and the financial world from financial Armageddon.
Did the Fed blink? Yep, they did. Are they wimps because of it? No, I don’t really think so. The more that I’ve been hearing and reading about what could have happened if AIG had filed for bankruptcy tomorrow, the more comfortable I am with the fact that the Fed did the right thing.
Is it the best thing? Well, the best thing would have been to have our financial markets to be ruled less by greed and ethical lapses and more by financial integrity, but since that seems to be lacking, this definitely was preferable to a total financial meltdown.
I’m not going to go into the specifics of what the plan is about, because others have covered that better:
and
Cover it well.
A couple of additional points:
1. The markets will, I believe, breathe a collective sigh of relief and move on to worrying about other issues (yep, we aren’t any where close to out of the woods on these things).
2. The mortgage market will remain volatile but will probably feel better and I think therefore a bit calmer.
Dodged this bullet, but the bad guys aren’t out of guns yet….
Stay tuned.
{ 5 } Comments
Tom, Funny how you started on with the moral hazard and ended up here? While I started out doubting the moral hazard argument and am now convinced that is exactly what happened at AIG. It seems unlikely to me that a company as large and varied as AIG goes from properly capitalized to bankrupt in one week or one month or even one year. I think the Fed’s and this administration simply threw a bone at them and all that talk about bankruptcy today was nothing more than spin! But then again what do I know????
David,
I’m still a proponent of the moral hazard theory, shall we say, but I’m also a believer in the shall we say, practical? It would be more wrong to have let AIG go under and ruin the entire financial world than it would be wrong to have the government step in, take 80% of the value of the company, kick out senior management (hopefully without golden parachutes) and provide them the funding necessary to do an orderly liquidation rather than a chaotic bankruptcy….
Does that make sense?
Tom
Yes, I get your thinking, just thought it was ironic that we both have at some level come full circle!
It seems unlikely to me that a company as large and varied as AIG goes from properly capitalized to bankrupt in one week or one month or even one year
Dave,
From what I’ve read, AIG basically got hit with an $85 Billion margin call. They were very leveraged (in certain but not all of their businesses). When the housing and mortgage markets went down, it brought down their ratings (see Sean’s Irony post at http://www.bloodhoundrealty.com/bloodhoundblog for thoughts on THAT) down. That required that they raise their capital ratios. How do you raise capital ratios? Come up with cash, LOTS of cash.
That’s how you can bring down a company in 48 hours or less (sounds like a book title?)
Tom
Yes, but I can’t believe no one saw this coming 4-6-12 months ago. Either the whole company had their heads in the sands or they simply failed at increasing their capitalization before the downgrade. By the way, the downgrade was only to “A”!
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