Wednesday, September 17, 2008

US Financials Gets More Socialized Every Day. But Housing Crisis Could Worsen if AIG Allowed to Fail.

What used to be gigantic private financial institutions are now funded by taxpayers. Wait--wait--isn't the reason that healthcare isn't socialized--because it's too expensive?

In the past 10 days, the Federal Government has bailed out Giant Mortgage Losers Fannie & Freddie; Tuesday night, the Treasury and the Fed agreed to bailout A.I.G.

They had no choice, according to NYT:

"What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars’ worth of risky securities that were once considered safe."

"If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt."

The company has been injected with $85 Billion, at over 11% interest for 24 months, while the US has a %79.9 stake.

If this hadn't happened, though, things would be worse than they are now for the U.S. economy and individuals: less credit, less ability to fund and refi mortgages, less consumer spending, higher unemployment, and so forth....

What next? Felix Salmon weighs in.

1 comment:

Jason said...

Yeah, universal healthcare looks like a fantastic deal right now.
And it looks like the direct costs of our "war" on the financial crisis are quickly catching up to our war on terrorism.

I'm afraid Salmon may be right. We're watching the RMBS (residential mortgage backed securities) market, which determines mortgage rates, take a real beating through all of this. Rates are up from their lows after the "Frannie" takeover.