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Government Buys Stock in Sinking Corporate Giants

Published 09/17/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

The Federal Reserve took a historic step into the private sector Tuesday evening by acquiring nearly 80 percent of American International Group, according to CNN Money.

The Fed decided last week not to take similar action in the case of Lehman Brothers Holdings, allowing the firm to collapse into bankruptcy. The Fed takeover of AIG marks the second instance this year in which the Fed guaranteed the toxic assets of a stumbling Wall Street firm with taxpayer money. The previous occasion was the Fed-brokered Bear Stearns takeover by JPMorgan Chase.

While the Bear Stearns case cost the Federal Reserve close to $30 billion, the current takeover of AIG includes a two-year bridge loan worth $85 billion. This is a hefty sum for a government constantly toiling in nearly insurmountable foreign debt.

The deal was hastily put together by members of the Treasury Department and the Federal Reserve over the past few days and was criticized by Democrats in Congress. They believe that this episode marks another instance of the government overstepping its bounds in an effort to protect large corporations from their own poor-decisions. There is also significant concern that the taxpayers, who are indeed financing the takeover, will not receive much in the way of benefits or return on their investments.

Fed officials argue that the takeover was necessary to avoid a potential crash of global markets. AIG is one of the world’s largest companies, and many believe that its bankruptcy would have sent a tsunami through the entire financial system. Since Lehman Brothers was smaller in scope, its insolvency was less destructive to the system in general. This is the same argument posited by those in favor of the Treasury Department takeover of Fannie Mae and Freddie Mac just two weeks ago.

The government’s handling of the financial crisis has been a major cause for concern among many experts, as well as the public at large. There is now the conception that some companies are “too big to fail” and will be bailed out regardless of the circumstances.

Fannie Mae and Freddie Mac guaranteed $5 trillion of American mortgages; AIG held $1.1 trillion in assets while servicing 74 million customers. These financial giants took the same gambles as Bear Stearns, Lehman Brothers, etc., but they were guaranteed by the government because their failure would have been a shock to the system. There seems to be no strict criteria, and there is no way of knowing how officials arrived at their decisions.

Washington Mutual is teetering on the edge of financial doom. Citigroup, nearly as gigantic as AIG, has suffered mightily in the last year. Will either of these giants be saved from collapse? The Fed claims that it acted in the best interest of the global economy, but if those actions were not in the best interest of America what good are they to the taxpayer?

Instead of bailing out the companies who gambled on bad debts – in the hopes that the market cycle, which is as guaranteed as gravity, would stop – we should allow them to collapse. Perhaps more efficient and effective replacements could fill their void.

Berkshire Hathaway deals with the same financial mechanism as all of the crumbling Wall Street firms, and it is the world’s tenth largest company. Yet it has not fallen victim to the housing and credit collapses which have rocked the industry to its core. This is not a chance coincidence. Berkshire Hathaway is better managed and less corrupt than the Wall Street giants. Instead of the government rewarding companies like AIG for their bad behavior, it should allow them to move out of the way to make room for promising replacements.

Source CNN Money:

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening. The Fed authorized the Federal Reserve Bank of New York to lend AIG the funds. In return, the federal government will receive a 79.9% stake in the company.

…


The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities. "If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."

Front Page Photo by monotasker- Flickr © Some rights reserved

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Article Comments From Readers

guest says "85Billion Loan" on 09/19/08
What you Americans may not understand is that the money is nothing more than a ledger balance, if this kind of money is invente then inflation just goes through the roof and you will become a worthless country, just like Germany in the second world war they also produced money from nothing, soon you people in America will be paying $50 for a loaf of bread, just like Zimbabwe you will need a plastic shopping bag to carry your cash around and it will be worthless on the global scale of monetary system...Bush is selling you out, he is producing money from nothing, just like he has up to now and just like he will in the future..you are swiftly becoming a banana republic and the American dollar due to inflation will be absolutely WORTHLESS...

guest says "Taxpayers WILL foot the bill" on 09/17/08
You're right, the government isn't reaching into my pocket right now for $85 billion, what it IS doing is spending from deficit. Every single dollar that the government spends that isn't spent paying back our foreign debt commitments puts us further into debt by putting off the payment. Right now we just pay the interest on the national debt (and even that amounts to billions annually), sort of like just paying the $10 minimum on $1000 worth of monthly credit charges.

Eventually the creditor comes calling and you'll have to pay up. But government creditors don't work on the time-span of a single human life. So yeah, they aren't asking ME for the money, but they are asking my great grandchildren for it. And with the future being the future (and thereby inherently unpredictable) it could be that we just keep doing this ad infinitum... or Japan/China/Europe builds up a grand armada, conquers the US and enslaves us until we repay our debt (plus reparations for the war to enslave us, plus interest, you get the point).

The government would literally have to stop EVERYTHING, yet still tax you for services it no longer provides, and put all of that money into paying off the debt to really tackle the issue. And it would have to continue this practice for generations, so don't expect to recover anytime soon. In the old world order warfare would wipe these things out. After WWI the U.S. was the world's gold safe (literally, we held almost all of it) and they owed us for that service. In a world where war is illegal - I'm not talking about brushfire conflicts, I'm talking about massive scale invasions - that wonderful little debt-eraser is out of the arsenal.

In a free-trade dominated world we're just all supposed to spend beyond our means and be content with it. The U.S. just needs to hope that some country out there doesn't wise up and realize that political realism didn't die with the Soviet Union and that power politics are still important. If somebody wants to thump us, they could do it. China could destroy America tomorrow by dumping our currency in full, we'd literally be completely annihilated economically. China may be planning to do just this, but they're just bidding their time until they can back up their economic terrorism with military might. Until then, we've got to cross our fingers and hope that our elites can wine and dine the world with country club memberships to the point that they forget just how completely owned we are.

guest says "What is the Fed? Let me tell you...." on 09/17/08
"The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit. The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system. The System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve has the authority to act on its own without prior approval from Congress or the President. The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations. The Federal Reserve System's unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed's responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent whilst also remaining within the government of the United States, it is often said to be "independent within the government."

The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock "may not be sold, traded, or pledged as security for a loan" and all member banks receive a 6% annual dividend. These member banks must maintain fractional reserves either as vault cash or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks (and since shares in ownership of the Federal Reserve Banks are redeemable only at par, the nominal "owners" do not benefit from this surplus capital); the Federal Reserve system contributed over $29 billion to the Treasury in 2006."

"Government regulation and supervision

The Board of Governors is the part of the Federal Reserve System that is responsible for supervising the private banks. A general description of the types of regulation and supervision involved is given by the Federal Reserve."

"The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. As of February 1, 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System."

from: http://en.wikipedia.org/wiki/The_Fed

Tax payers pay back all money lost by the government eventually, in our case it will be our children paying back loans. If we can't pay it we will have to work it off.

guest says "Fed" on 09/17/08
Questions: Since the Federal Reserve System is privately owned (it is owned by the member banks) where is the $85B coming from? Who will collect the 8.5% interest on this loan? Is the $85B private money? If not, by what mechanism can the government put $85B into the Federal Reserve System? Who, exactly, is buying AIG?

guest says "One rule for the rich.....poor" on 09/17/08
Can the government pay off my $20,000 debt. Silly me I am not rich enough to warrant the help. Hopefully Obama can help in some way if he becomes President. Then again he may be another corporate lackey.

Wake up America, the end of Your world looks to be just around the corner.

guest says "Good article...." on 09/17/08
I agree with the article for the most part. However, taxpayers are not going to pay for any bailout of these companies. Most households have low or negative savings, and lack the disposable income to pay for hundreds of billions, maybe trillions, in bailouts. This wil add to the government's already bloated debt. When our creditors come calling, the gov't will have to give our counrty away - toll roads, land, corporations, anything of value, to asians and middle easterners.

guest says "BAILOUTS" on 09/17/08
YOU KNOW THE GOVERNMENT IS BAILING OUT THESE FIRMS FOR ONE CONTENTION ONLY-THE BUSH ADMINISTRATION WANTS MCCAIN IN AS PRESDENT, I THINK THEY ARE DOING THIS TO PROTECT HIM, I THINK TO MY ESTIMATION THAT THE BALL IS GOING TO FALL ON ALL OF THIS ABOUT MID MARCH, THERES NO MONEY LEFT, WERE BAILING OUT COMPANIES AND PRINTING MONEY THAT IS WORTHLESS, WERE DEEP IN DEBT WITH NO MANAGEBALE AY TO PAY IT OFF, NAFTA IS KILLING THE WORKING FAMILY, 50 MILLION WITHOUT HEALTH INSURANCE OR UNACCEPATABLE INSURANCE,MORTGAGE CRISIS, PEOPLE LOSING THERE HOMES, THIS IS A MESS-STARTED WITH THE CLINTON ADM AND CONTINUING ON WITH THE BUSH ADMIN-THE GREEDY GOT RICHER AT THE EXPENSE OF THE COUNTRY- NICE GOING ,THIS SHOULD BE CLASSIFIED AS TREASON TO THE AMERICAN POPULICE