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WOW(!!) - Fed to Give A.I.G. $85 Billion Loan and Take 80% Stake

Tuesday, September 16, 2008, 7:39 PM

This is an incredible turn of events.  This is the biggest news of the decade.

I was not expecting this sort of activity for another year or two yet.

The Federal Reserve has bought a majority stake in a private company in exchange for cash.  Where did the Fed get this cash?  It was created out of thin air.

In just in the past five days, the Fed has vastly expanded its Treasuries for Trash(tm) program, begun accepting equities from stricken companies in exchange for cash or higher quality assets, and now  has actually bought a gigantic insurance company. 

I'll let this article from the NYT fill in the details.

Quote:
In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people with knowledge of the negotiations.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for the company to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.

The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.

Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.

But with the prospect of a giant bankruptcy looming — one with unpredictable consequences for the world financial system — the Fed abandoned precedent and agreed to let the money flow.

Link to Article (no additional content, I posted the whole thing) 

Here's my very direct and simple thought: The US dollar is toast.

The other central banks are doing what they can to stem the tide, but, mark my words, sooner or later reality will catch up and the dollar will plummet.  How can it not?

Think about it...the dollar is indirectly the obligation of the US, but more directly the obligation of the Federal Reserve. 

The Federal Reserve now sports a completely ruined balance sheet.  So you would be right in asking yourself, "What does a dollar represent, after all?"

If you find yourself stumped, you will be in the company of the rest of the world.  Let me put it this way: If I were a Saudi prince, I'd be asking myself, "What exactly is the long-term direction of a currency that is backed by defective loans, unsaleable assets, and positions in failed companies?"

Indeed, that now describes the balance sheet of the Federal Reserve.

I cannot state this strongly enough - the stage is now set for a major dollar collapse, and whether it does or not depends completely on the behavior of non-US financial entities.  The dice are cast, and it remains to be seen whether they turn up snake-eyes or not.

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12 Comments

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
WOW WOW WOW where is ron
WOW WOW WOW where is ron paul when we need him to wipe the lipstick off the pig. i just wonder if they will have enough paper to print up some more for gm ,ford and chrysler. the creature from jekyll island is out of the box.
bearing01's picture
bearing01
Status: Silver Member (Offline)
Joined: Sep 8 2008
Posts: 153
US Treasuries or Gold?
Looks like people have been buying US Treasuries as a safe haven for their money. Why I still don't understand. Gold hasn't been moving much. Is it time to buy gold? Time to buy Commodities again?
cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Next up will be....

 

...GM, then GE, then Ford, then ....where does this stop exactly?

 

Good grief, I know they are fighting fires, but any pretense of doing it within the boundaries of the rule of law has been completely chucked out the window without even the slightest explanation or apology.

 

Free market?  Only when you lose money from your trading account or pension.

 

The failure of the dollar to immediately begin crashing here tells me that when it comes to the dollar, we are living in a tightly managed system where the relative price of trillions of dollars are set by a group of folks numbering ~150.  It is a virtual certainty that their well-meaning attempts will end badly.

 

Chris Martenson

DanS's picture
DanS
Status: Member (Offline)
Joined: Apr 6 2008
Posts: 21
Very strange...

Global financial markets are acting very abnormal, probably due to the distortions caused by the $500+ trillion in derivatives, and the reality that it's difficult to get the Western world's central banks to act in concert to staunch the growing deflationary spiral.


As the global economy stalls, it's understandable that THE central bank (e.g. The Fed) would be drawn into the position of providing liquidity (electronically create dollars) to fight the systemic hemorrhaging. The problem is that they can't do it alone, without entirely destroying the U.S. dollar. (Yes, this is echoing CM)


The near 20% loss in the Russian stock market reflects their speculative bubble bursting; a speculative economy built on high and rising price of oil. Poof! That collateral is being cut in half (i.e. moving toward $75).


What doesn't make immediate sense to me is the downward pressure on commodities. Where is the "flight to safety"? The reciprocal (inverse) relationship appears to have disappeared or is being obfuscated by the effects of derivatives, shorts, etc. Why isn't gold and silver acting the role of real money? Is there a disconnect between gold and silver market pricing and the availability of the physical commodity?


Ron Paul is probably sitting in some bunker. :-)

Orangedem's picture
Orangedem
Status: Member (Offline)
Joined: Aug 29 2008
Posts: 19
One of the Big 3 automakers
will be out of business in 18 months. So said Amory Lovings of the Rocky Mountain Institute on Charlie Rose last fall. Looks like he's about right.
Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
AIG- sorry Chris with the info I have seen so far, I have to
disagree with some of the things being said about this deal. Having a $85B line of credit isn't like taking on $85B of debt... it is there to shore up their ratings and be used if the sum of their asset sales miss the mark and liabilities threaten to bring them offside on their ratios. I don't think it was their intention to get into the insurance business nor 'bail' out just another institution. They were faced with a very serious situation and like in the past, the ratings agencies put the gov't in a difficult position where they needed to act quickly. They're still acting upon information that is changing by the day and visibility is very bad. That being said, this package was done to fund the overall unwinding of AIG which was too big to fail. By doing this they will control the company and force it to sell assets and break it down into units which are NOT too big to fail. In my opinion, the whole goal of this 'rescue' was to facilitate an orderly liquidation and help the deleveraging process continue. The deal was pretty smart when you think about it... 80% of the equity even if they get paid back?! There are real assets to this company and it's not a house of cards... the lack of confidence has put a company which is 'too big to fail' on the brink of collapse and risks a total systemic cascade of events. The government would not be wasting tax payers money if they held an orderly sale of assets over 2 years and didn't need to dip into the $85B line of credit.
ytterbius's picture
ytterbius
Status: Member (Offline)
Joined: Jun 22 2008
Posts: 19
"depends completely on the behavior of non-US financial entities
So, what does this say about who needs to be our next President? I say it's support for Obama, because the rest of the World is NOT going to put up with McCain's Warlike Flailings.
Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
On 9/10 Chris made this
On 9/10 Chris made this statement: "One of the greatest sources of confusion out there is what inflation and deflation mean. So let's put a definition in here: 1) Inflation = a rise in money stock in proportion to goods, services AND assets (that last one is conveniently ignored by our Fed which is the single greatest intellectual oversight/mistake that they make)." I have the general sense that this is a profound statement and that I should understand it. Chris, can you expound on this? Why should assets be part of the equation and why is this such a huge oversight by the Fed? Do you mean to explain why we can have an inflationary outcome at the same time that assets are shrinking, or ? I get the feeling that understanding this may be key for more confidently predicting whether/when we might get an inflationary outcome. Thanks!
rob@2disc.com's picture
Status: Member (Offline)
Joined: Apr 4 2008
Posts: 4
Hi Chris (from Rob
Hi Chris (from Rob Laporte), Regarding devaluation of the dollar, I pose an alternative scenario, which I don't believe but think is quite possible. (1) Debt being money, the destruction of debt through write-offs and devaluations reduces the money supply (M3). Fed actions roughly countervail that trend, and thus don't necessarily produce monetary inflation. In fact, the debt destruction can cause deflation, though less likely than at least some inflation. (2) A combination of (a) many fleeing towards ostensibly safe US treasuries and (b) non-US holders of various US notes decide to buy US assets while they can, causrs a rise in demand for and thus strength of the dollar. One or both of these factors may account for gold not doing as well as one might expect at this time. (Selling of gold to raise capital is another big factor, though more temporary.) That is, the destruction of debt (i.e M3 money) reduces the supply of money relative to gold.
joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
i am not too happy with
i am not too happy with either mccain or obama. but mccain is totally out of it on the economy. he is still running around the country saying the fundamentals are strong.which is true i guess if you own how many houses? and has as his chief economic advisor phil gramm who considers those of us out here watching our money disappear as nothing but whiners. yet the both of them were presiding over the very policies or lack thereof which got us here. of course by this time no one has a big enough shovel to dig us out. but i could be wrong someone who can field dress a moose might be able to get us out of here. next stop teheran that would make it three in a row and we would win the game of tic -tac- toe hey ron any room in the bunker?
Reuben Bailey's picture
Reuben Bailey
Status: Silver Member (Offline)
Joined: Mar 17 2008
Posts: 138
Bailing out the Fed?
I just found this on Yahoo finance's market update page:

"10:35 am : The Treasury is setting up a temporary financing program at the Fed's request. The program will auction Treasury bills to raise cash for the Fed's use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters."

Hello? Can you spell trouble?

DanS's picture
DanS
Status: Member (Offline)
Joined: Apr 6 2008
Posts: 21
9/18/2008 "The US Federal
9/18/2008 "The US Federal Reserve announced a 180-billion-dollar cash line to fight the racing fires of global financial crisis Thursday, as leading central banks said they would join in.

"The Federal Reserve said it was expanding its temporary arrangements for banks to obtain dollars by 180 billion "to provide dollar funding for both term and overnight liquidity operations by other central banks." Reported at $370 billion. But, this is just of starters.

"'Come!', I looked, and there before me was a black horse! Its rider was holding a pair of scales in his hand. Then I heard what sounded like a voice among the four living creatures, saying, 'A quart of wheat for a day's wage, and three quarts of barley for a day's wage, and do not damage the oil and the wine!'" Rev. 6:5:5-6.

Now...understanding the gravity of a potential 'meltdown', the West's central banks are now operating in concert to flood the global economy with more liquidity. Now we get worldwide hyper-inflation. Hang on to your hats...and everything else!

http://www.breitbart.com/article.php?id=080918083207.wh5hl7iv&show_article=1

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