Fed takes over AIG - $85B loan

[Kilgor]

Federal officials will take 80% stake in the nation's largest insurer in an $85 billion rescue plan to prevent financial chaos worldwide.


NEW YORK (CNNMoney.com) -- In a stunning turn, the Federal Reserve Board is taking over crumbling insurer American International Group in an $85 billion rescue plan, officials announced Tuesday evening.

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) up to $85 billion. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they must act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

"The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

A bailout of AIG would mark the most dramatic turn yet in an expanding crisis that started more than a year ago in the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry .

The line of credit, which is available for two years, is designed to help AIG meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates. AIG will sell certain of its businesses with "the least possible disruption to the overall economy."

Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.

The government had resisted throwing a lifeline to AIG, hoping to entice investment firms to set up a $75 billion rescue fund. Officials opted not to bail out Lehman Brothers, which filed for bankruptcy on Monday. But by Tuesday night, it became clearer that the private sector would not step in to help AIG, which has a greater reach into other financial companies and markets than Lehman does.

"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," said Treasury Secretary Henry Paulson. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."

Without word from the government, the company's options grew more limited as the day wore on. Its already-battered share price fell another 21% Tuesday with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading.

AIG did not immediately return calls for comment. The company issued a statement late Tuesday afternoon saying it "continues to pursue alternatives."

The statement also told policyholders that its general and life insurance businesses, as well as its retirement services division, were adequately capitalized and operating normally.

The company was scrambling to raise capital to stay afloat after being hit with credit rating agencies downgrades that is forcing it to come up with billions of dollars in additional collateral fast.

New York State officials, who regulate the insurance titan, had urged the federal government to rescue AIG.

"I don't think this country, with all we've been through right now, where our economy is, can afford it," New York Gov. David Paterson told CNN.
New York State tried to help

The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.

"It has to be part of the solution to the problem," said spokesman David Neustadt.

Paterson said AIG could transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations. In exchange, the parent company would give the subsidiaries less-liquid assets of the same value. He stressed the company is financially sound and that no taxpayer dollars are involved.

Also Tuesday, former Chief Executive Maurice "Hank" Greenberg said in a regulatory filing that he is monitoring the situation. Among the moves he is considering: purchasing AIG assets, lending to the company, investing more in it, seeking board seats, acquiring the company or offering advice to management.

The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts could prove deadly to AIG (AIG, Fortune 500) and force it to post more than $13 billion in additional collateral. Shares were down 35% in mid-day trading after falling more than 70% in early morning trading and losing 61% of their value the day before.

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement, citing AIG's July 31 estimates. Also, the moves will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

Analysts urged the company to unveil its restructuring plan.

"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," said Rob Haines, analyst at CreditSights.
Global ripples if firm were to fail

If AIG were to fail, the global ripple effects would be unprecedented, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the credit default swaps market, an 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."

AIG has had a very tough year.

Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.

Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.

The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.

This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), in his place. To top of page

http://money.cnn.com/2008/09/16/news/companies/AIG/index.htm

[Moledet]

If AIG falls we are all going to be in trouble. Almost all insurance companies world wide insure some of their clients there, they will not be able to cover the policies otherwise and no one will have insurance (at least not in today's prices).

[wildcat]

They should of let it fail, That what this market needs, is to fail, All this tab will be picked up by the US taxpayer, and the fat cats at the top of all these banks walk away even fatter cats. it is criminal.

[Gat0r]

Hmm pretty unconstitutional I might add, no government or central bank can overpower the market when it decides to get rid of bad credit/debt, the more resistance to the market's movement the longer and worse the hardship will be, let the market run its course!

[Mr.K]

They should of let it fail, That what this market needs, is to fail, All this tab will be picked up by the US taxpayer, and the fat cats at the top of all these banks walk away even fatter cats. it is criminal.
I second that motion! Those people need a nice purge, now they're probably laughing at us, knowing we will bail them up when they'll screw up again.
I would love to see those arrogant yuppies walking out with a sad face and a banker box in hands.
The same people who call for less regulation and governement intervention are the same crying for help and looking up to the governement to save them.

[2Sheds_Jackson]

Hmm. Interesting. The conspiracy nut inside me is grinning. On one side we've got a bunch of nations nationalizing their petro resources & minerals etc. Then as a result of laws that our government created in 1999 - that same government is able to grab the largest financial institutions in the land. Those institutions lubricate the wheels of the global economy - which of course also includes commodies...like petrolem and minerals.

I guess we'll see how the street likes this takeover in a few hours.

[Winger]

Its a loan, not a bailout. I question the validity of ownership in the article. The gov. will defacto own it until everything has been repaid. Remember, Lee Iacoca got one for GM from Carter and paid it back in full with interest. That was deemed necessary at the time.

However, if it turns out it's not a loan then its going to be a long term investment. You see, AIG like all other insurance companies must invest 90% or so of their investments in high yield government bonds. The types of bonds that you can only buy with millions of dollars and give about a 9 to 10 percent return. Not sure if that standard has changed or not.

They shouldn't allow an insurance company to get that large to the point where they have 1 trillion in assets. Thats just ridiculous. They should do what they do with Telecom companies. Once their too big, break them up to ensure competition.

[ocean]

In a free market economy if it happens it happens. .. or do we not believe in free market in reality?

[Winger]

In a free market economy if it happens it happens. .. or do we not believe in free market in reality?

If the free market were truly 100% free we'd all end up worshipping Bill Gates as the one true owner of everything.

[Flagg]

Most people are still missing the bigger picture that isn't being well covered.....

DERIVATIVES

If the only thing at stake when one of these biggies falls over was the shareholders......they'd be dead and buried and we'd be well past it.

The problem is the largely undisclosed derivatives.....which are contracts BETWEEN all these major banks, insurance companies, investment companies, and pension funds.

AIG lost most of it's book value in the past week........I can't believe I'm saying this about this much money but, BIG DEAL....fifty billion is chump change in scale

The BIG money is the MULTI TRILLION derivative book that comes due, almost immediately, upon winding up AIG......

Throwing cash at the problem, merging the problem, and ring fencing the problem are all stop gaps until:

a.) These derivative positions are unwound "in an orderly fashion"...which would be like successfully herding 1000 meth-crazed cats

b.) Derivative positions unwind in "a not very orderly fashion"....defined as burning and looting

"counterparty risk" = danger a party to a trade fails to keep its promise...get to know it

When a company goes bankrupt and it's derivative positions are not ring-fenced or acquired then the position comes due....and the BIG can of worms gets opened.

Anyone familiar with the number above Trillion...it's Quadrillion......which is a number I became aware of a few months ago when the total dollar value of global derivatives exceeded it.

1,000,000,000,000,000....fifteen frickin zeros...it's not even monopoly money anymore.

[T3ngu]

Damn your Flagg, your posts make me think, which makes my head hurt, but i can't not read them.

Reported for writing sensible posts.

[Violet Fashion by Mindy]

No wonder my super fund has lost so much. Even though I specifically stated that that my investments are only to be invested in companies/funds that are in the renewable/clean energy game.

[Blue_0]

Are you guys nuts? -> this is an awesomely smart move by the USG!

Lets think about this. AIG is worth $512 billion dollars yesterday. For an $80b loan, the US gov gets 80% of that $512b!

Back in the 80s the US gov did the same thing in "bailouts" back then, and sold the assets off at a significant profit!

Take $512 * .8 = $409b in capitol to sell off! And that is assuming the value doesn't bounce back up.

The best part is, since the USG lent 80b to an organization it is soon to own 80% of, it will be able to pay itself off as it sells off AIG, and then everything beyond that 80b (409 -80 = ), 329 billion in pure profit for the US taxpayer at todays prices!

[hskywalker]

Are you guys nuts? -> this is an awesomely smart move by the USG!

Lets think about this. AIG is worth $512 billion dollars yesterday. For an $80b loan, the US gov gets 80% of that $512b!

Back in the 80s the US gov did the same thing in "bailouts" back then, and sold the assets off at a significant profit!

Take $512 * .8 = $409b in capitol to sell off! And that is assuming the value doesn't bounce back up.

The best part is, since the USG lent 80b to an organization it is soon to own 80% of, it will be able to pay itself off as it sells off AIG, and then everything beyond that 80b (409 -80 = ), 329 billion in pure profit for the US taxpayer at todays prices!
Are you serious? AIG is not worth $500b yesterday.

[Blue_0]

Are you serious? AIG is not worth $500b yesterday.

Your right, I am wrong.

I got them mixed up with something else. It was only worth $47b yesterday, with a value of $156b a year ago. Much more contraversial.

[Flagg]

No wonder my super fund has lost so much. Even though I specifically stated that that my investments are only to be invested in companies/funds that are in the renewable/clean energy game.


Sorry mate! :(

Renewable/clean tech will likely get hammered hard as energy prices come off the boil, BUT I'm guessing energy prices sky again in 2009/10 then you should see gains again in alternative energy...but till then could get UGLY for the sector

[Flagg]

Are you guys nuts? -> this is an awesomely smart move by the USG!

Lets think about this. AIG is worth $512 billion dollars yesterday. For an $80b loan, the US gov gets 80% of that $512b!

Back in the 80s the US gov did the same thing in "bailouts" back then, and sold the assets off at a significant profit!

Take $512 * .8 = $409b in capitol to sell off! And that is assuming the value doesn't bounce back up.

The best part is, since the USG lent 80b to an organization it is soon to own 80% of, it will be able to pay itself off as it sells off AIG, and then everything beyond that 80b (409 -80 = ), 329 billion in pure profit for the US taxpayer at todays prices!

You're on the dope.......

AIG is sitting on a $2-ish TRILLION dollar pile of derivatives.

You should rethink your risk/reward maths

[Moledet]

Flagg, if AIG goes down would we have insurance (life, home, car...)? I mean, who is going to cover it when the largest insurer is down?

[Flagg]

Flagg, if AIG goes down would we have insurance (life, home, car...)? I mean, who is going to cover it when the largest insurer is down?

Depends......

The way insurance works is:

Insurance premiums are collected

Insurance premiums are invested(fiduciary responsibility to ensure investment cashflow is sufficent to meet claims obligations)

Insurance claims are submitted

Claims paid out

-----------------------------

If companies are making an underwriting profit(where MORE premiums are taken in than PAID out in claims), and all things are equal(customer numbers and claims don't drift much), then everything is sweet

If companies are NOT making an underwriting profit then the premiums invested need to generate enough of a return to cover claims paid out

Insurance companies also buy/sell insurance policies for OTHER insurance companies called reinsurance.......it's a smart and responsible way of spreading risk...diversifying risk...a home insurance company in California may want to reinsure with a home insurance company in Idaho.

Insurance companies are an example of often smart derivative use.....to actually throw off, and spread risk responsibly

NOT to use derivatives primarily for profit generation, speculation, or "insuring" something where the risk cannot be calculated.....think of much of the derivative problem as blindly offering life insurance to a bunch of 90 year olds who smoke two packs a day with heart disease and AIDS.....but they CLAIM to be 25 year old fitness freak vegetarians...and no one bothers checking

To make a long story short.........your insurance should continue as properly priced home and life insurance are cash cows.....but it depends on juristiction in terms of how insurance premium funds are protected from events like liquidation....and the possibility of policy termination

The worst that will happen for individuals is likely to be:

policies cancelled......means a search for a new provider.......in a reasonably competitive marketplace it should be relatively painless

policy premium increases.......as in post 9/11 reinsurance policies resulted in global insurance premiums rising as the risk was spread......again a good use of derivatives...but if insurance companies get stretched for cash to cover their exposure to the derivative meltdown i can see insurance premiums going up everywhere as a REAL possibility...just a hunch.

Coincidentally...speaking of insurance:

Last week, when the Fed bailed out Freddie and Fannie.......Warren Buffett, who's as media shy as an old school mafioso, was put on the phone for an interview claiming "everything is great"

Within two days, one of the insurance companies he controls which offers insurance to banks for deposits above the $100k FDIC limit, said they are exiting the entire business.....cancelling ALL policies..pretty much ASAP.

So if the guy considered to be one of the best investors alive, as well as one of the best insurance guys alive cancels all deposit insurance.......what does that tell you?

To me, Buffett thinks that a whole bunch of banks could realistically fail.......as well as insurance companies

[Billy No Mates]

This whole situation is really serious,the boys in the city of London might have to make do with 5 rather than 6 figure bonuses .

[Flagg]

This whole situation is really serious,the boys in the city of London might have to make do with 5 rather than 6 figure bonuses .

One bit of good news in that respect is......lots of FIRE industry workers are going to be thiking hard about that 2nd interview for intern at Taco Bell.

[Billy No Mates]

Yes every cloud has a silver lining .

[Red-Phos]

If they fall Man utd fall so i am happy as **** if they do.

[IDF_TANKER]

Flagg, if AIG goes down would we have insurance (life, home, car...)? I mean, who is going to cover it when the largest insurer is down?

The Israeli AIG representative claims for example that AIG Israel is financially undependable from the American one, they have their own capital etc. I guess in other countries it works similiraly.

[CMNot]

lots of FIRE industry workers are going to be thiking hard about that 2nd interview for intern at Taco Bell.

Could you explain this one for me? Are we talking hedge fund sharks or something?

[BugHunt]

They should of let it fail, That what this market needs, is to fail, All this tab will be picked up by the US taxpayer, and the fat cats at the top of all these banks walk away even fatter cats. it is criminal.


That seems to have been the action which started the 1929 Great Depression....

So it wont just be a "few fat cats" hit...

[wildcat]

Flagg, if AIG goes down would we have insurance (life, home, car...)? I mean, who is going to cover it when the largest insurer is down?
each state guarantees the coverage, until you can switch.

[wildcat]

I am hearing WAMU is in lots of trouble, there are the nations largest bank at the moment.

[danielc]

It's good that the government is stepping up to do some damage control, doing nothing in these circumstance would be the worst thing to do.

[Crazed Aussie]

Nice posts Flagg, very informative. I'll put this out there and probably get crapped on but... as far as I can see, this whole financial fiasco from sub-prime all the way thru is an engineered gig designed to rip a lot of people off, whilst ensuring a pretty select few will profit eg: speculators. There i said now let the slaggin' begin. Oh and I look forward to other outrageous ideas along these lines. Cheers guys.

[Rudolph]

The Israeli AIG representative claims for example that AIG Israel is financially undependable from the American one, they have their own capital etc. I guess in other countries it works similiraly.

Seems to be the same here, some loss, but nothing too major. Since middle 2007 you are not allowed to take a home loan that takes more than 30% of your proven income - taking into account car payments, outstanding debt, etc... Some people complained, but I think that more than a full year of this helped a lot already!

[Dominique]

They shouldn't allow an insurance company to get that large to the point where they have 1 trillion in assets. Thats just ridiculous. They should do what they do with Telecom companies. Once their too big, break them up to ensure competition.

From what I understand, that's the plan. AIG is so large Uncle Sam wants it split up into smaller more manageable companies. The 85 billion is to insure they can keep their bills paid (at the moment they don't have enough cash on hand to cover all the policies they've issued). Over the next two years they'll sell off some of their assets, keeping the companies that were actually making money, and dumping insurance policies that they were loosing money on. They also fired their president, and more firings and layoffs are likely. Since Uncle Sam will have the controlling interest (they'll own 80% of the companies stock) they'll get a to approve any major finical decisions. At the end of the two year period, AIG will have paid back the loan, with interest, and purchased it's stock back. So well see how this works out in the end.

[PVJ]

The loose regulations gave mortgages to people who couldnt pay them, and now when the idiots realize they screwed up they want taxpayer money to save their @sses so they can pull the same sh!t in the future? That is beyond bullsh!t. They Privatize the profits, nationalize the debt, and the taxpayers get screwed.

[BugHunt]

From what I understand, that's the plan. AIG is so large Uncle Sam wants it split up into smaller more manageable companies. The 85 billion is to insure they can keep their bills paid (at the moment they don't have enough cash on hand to cover all the policies they've issued). Over the next two years they'll sell off some of their assets, keeping the companies that were actually making money, and dumping insurance policies that they were loosing money on. They also fired their president, and more firings and layoffs are likely. Since Uncle Sam will have the controlling interest (they'll own 80% of the companies stock) they'll get a to approve any major finical decisions. At the end of the two year period, AIG will have paid back the loan, with interest, and purchased it's stock back. So well see how this works out in the end.

Sounds like a interesting theory, but just who the hell is going to buy up there loosing polices in the current climate where even profitable ventures arent attracting capital?

[Winger]

The loose regulations gave mortgages to people who couldnt pay them, and now when the idiots realize they screwed up they want taxpayer money to save their @sses so they can pull the same sh!t in the future? That is beyond bullsh!t. They Privatize the profits, nationalize the debt, and the taxpayers get screwed.

Clarification:

1. Congress/SEC has been steadily loosening regulations on practices for issuances of loans.
2. Brokers & Banks offer loans to pretty much anyone in mortgage vehicles with adjustable rate mortgages. The debtor pays OK for the first year or so as that period is fixed.
3. Banks sell off these mortgages to companies like Freddie and Fannie as investments. The mortgages are repackaged as ventures in the form of hedge funds.
4. The debtors have their interest rates raised because they were not fixed rate mortgages. In many cases they cannot pay. However, there are many that are paying them on time and are current. Only 2.8% of mortgages are currently defaulting. The debt is owned by Freddie/Fannie and investors/401Ks/pensions. Most don't know the real details about where their money is invested.
5. The current market has devalued property values significantly. So, the ones that are paying on time are as much of the cause of the problem. Because, they are paying on mortgages that are devalued. These devalued mortgages are what the investors are holding. Basically, their investments have lost as much as 50% of their value.
6. This is the real alarm. Not so much the defaulted mortgages, but the ones that are being paid on. They are not turning a profit for investors and as of now they are bleeding money.
7. When the market is back up and the homes retain a higher value there will be a momentary celebration, people are going to want to sell this stuff off once its back in the green because during the average 30 year cycle of a mortgage the price will go back down and then come back up an undeterminable amount of times.
8. Question is who will buy? The American Government. They realize that these funds and investments are now biohazard. No one will want to touch them now that they realize what they have actually bought.

[Steaks]

Remember a few years back when every financial corp seemed to be consolidating, eating up competitors? I think I know why. They CAN'T be pushed out of the game if they're the only players. Now we have to keep them alive.

[Knutsen]

What happened to "free market" and capitalism?
Where are Friedmans' followers? What do they think about this? Wolfowitz? Rumsfeld? Bush? What do the IMF and World Bank have to say about this?

What happened to stalinist government intervention in stalinist things like health care? Giving free health care is evil socialism but interventing large corporations is not?

Someone missed Mr Friedman's lessons in the land of free market.... rofl

Here's a good joke explaining everything:

The shirt of the guy in the left says "company" and the one on the right says "State", and the "company" sings:

"I fill my pockets without your intervention..."
And the "state" sings:
"... but if you break i will pay for it"

Down right it says: "Free Market" the musical!!!

http://blogs.publico.es/vergara/files/2008/09/2008-09-17.jpg

[2Sheds_Jackson]

What happened to "free market" and capitalism?
Where are Friedmans' followers? What do they think about this? Wolfowitz? Rumsfeld? Bush? What do the IMF and World Bank have to say about this?

What happened to stalinist government intervention in stalinist things like health care? Giving free health care is evil socialism but interventing large corporations is not?

Someone missed Mr Friedman's lessons in the land of free market.... rofl


Even our "free" market isn't free - it's heavily regulated. It's a question of balance - the world isn't set in stone and we have to change to stay competitive. We can begin to over-regulate tomorrow and watch all our investment capitol head elsewhere.

[CPL Trevoga]

Welcome to the Communism gentlemen or rather comrades. :)

[PVJ]

How bout the US rescues the people who are about to lose their homes. They set up a huge fund and provided hundreds of billions of $ to help the people who are responsible for the economic fvck up. Now he taxes of the people who lost their homes because of the lack of regulation are being used to bail out the people who fvcked them over in the first place. Props to those people for not rioting and overthrowing the government, cuz this is bullsh!t.

[Kilgor]

How bout the US rescues the people who are about to lose their homes. They set up a huge fund and provided hundreds of billions of $ to help the people who are responsible for the economic fvck up. Now he taxes of the people who lost their homes because of the lack of regulation are being used to bail out the people who fvcked them over in the first place. Props to those people for not rioting and overthrowing the government, cuz this is bullsh!t.

Many (read not all) homeowners are equally responsible for their own mess by pure greed. There is no one villain in this unfolding disaster.

[CPL Trevoga]

Many (read not all) homeowners are equally responsible for their own mess by pure greed. There is no one villain in this unfolding disaster.

How about the leadership of that trillion dollars company? They were paid a lot of money just for that, to be responsible.

[Kilgor]

Read the last sentence of mine.

[Knutsen]

Even our "free" market isn't free - it's heavily regulated. It's a question of balance - the world isn't set in stone and we have to change to stay competitive. We can begin to over-regulate tomorrow and watch all our investment capitol head elsewhere.

Well, in 1997 during the heavy crisis in SE Asia one of the conditions of the IMF in order to help South Korea was that the Government could not "rescue" the banks since the market regulates itself. This doctrine has always been applauded by the US government of today.

The sad thing here is that probably when all this **** fades away and economic growth returns the politicians (especially the conservatives) and most economic lobbies will start to say that this crisis was a lesson in which we learned that no public intervention should happen, returning to the famous "when i win it is private, when i loose it is public".

[Knutsen]

Many (read not all) homeowners are equally responsible for their own mess by pure greed. There is no one villain in this unfolding disaster.

That is true, i'm observing this also in Spain (which has the same symptoms as the US), where a lot of people made terrible mistakes, basically, many middlo-low class guys pretending to be millionaires. But the thing is that many millions who just wanted a house are right now fvcked up because some rich guys' greed was huge.

The thing is that housing is (or should be elsewhere) a constitutional right (i don't know if that's the case in the US but my arguments apply) but you're not allowed to build your own house in the middle of the woods if you want, you can't get some spare materials and build your house and of course you can't pay your house in cash so you have to follow the official rules, and those rules say that houses are way more expensive than they actually are. There are some rich guys who made ENORMOUS profit (with the OK from the governments) with the peoples' lives and rights and when things go wrong (mostly due to the rich guys) people who were FORCED to follow this rules are left behind, instead the governments are helping the rich guys who rather than paying for their (in my opinion) crimes, are being fired with HUGE and INSANE compensations (let alone the money they legally stole from millions of people).

[2Sheds_Jackson]

Well, in 1997 during the heavy crisis in SE Asia one of the conditions of the IMF in order to help South Korea was that the Government could not "rescue" the banks since the market regulates itself. This doctrine has always been applauded by the US government of today.

The sad thing here is that probably when all this **** fades away and economic growth returns the politicians (especially the conservatives) and most economic lobbies will start to say that this crisis was a lesson in which we learned that no public intervention should happen, returning to the famous "when i win it is private, when i loose it is public".

Well we've got two separate issues here; regulation and intervention. Like I said before - regulation is a relative term, since even when we "de-regulated" the investment banks, they were still subject to regulation. If you regulate too much in order to reduce risk, you also reduce the ability to make profit. If our markets become less profitable, people just put their money elsewhere...so it's a balancing act between profit and security.

As for intervention - I don't think anybody will be able to forget this level of intervention. We still remember bailing out the Chrysler corp in the 70's, and the S&L crisis in the 80's - and this will dwarf both of them. If anything, since we learned the lesson of the great depression, we've demonstrated that there is indeed a place for government intervention, and we haven't hesitated to use it when necessary.

[Knutsen]

Well we've got two separate issues here; regulation and intervention. Like I said before - regulation is a relative term, since even when we "de-regulated" the investment banks, they were still subject to regulation. If you regulate too much in order to reduce risk, you also reduce the ability to make profit. If our markets become less profitable, people just put their money elsewhere...so it's a balancing act between profit and security.

As for intervention - I don't think anybody will be able to forget this level of intervention. We still remember bailing out the Chrysler corp in the 70's, and the S&L crisis in the 80's - and this will dwarf both of them. If anything, since we learned the lesson of the great depression, we've demonstrated that there is indeed a place for government intervention, and we haven't hesitated to use it when necessary.

The housing market should be much more regulated because such enormous profits should be illegal. If you want to make business do it with whatever you want , cars, computers, travels, etc, but not with houses. (ok, i admit it, this is happyland utopia but let's talk about facts).


And about intervention, i'm 100% for it, but i see 2 problems in this US case:

1- Hypocrisy: Friedman's theories, which are supposed to be the ones the US government are following , say that the government should have NO intervention at all, and this theories or doctrines have been strictly followed elsewhere. I mentioned SE Asia, but you can find the same kind of conditions coming from the US, the IMF and the WB in Poland and Russia in the early 90's , or in South America during the 70's and the 60's. It is also the doctrine followed by the praised Margaret Thatcher. All this things, together with the attitude towards Bolivia or Venezuela when they do the same with THEIR main source of wealth is what really puzzles me.

2- Intervention for who? For the people who are suffering? Of course not, for the rich guys who will be equally rich tomorrow, but many millions might not even own a house tomorrow.