1 Boring Old Man

Fed’s $85 Billion Loan Rescues Insurer

^{Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group. The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history…}

^{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. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.}

^{“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible”…}

U.S. Seizes Control of AIG With $85 Billion Emergency Loan
Insurer’s Wide Reach Justifies Intervention, Fed Says

^{The move to lend the Wall Street giant up to $85 billion in exchange for nearly 80 percent of its stock effectively nationalizes one of the central institutions in the crisis that has swept through markets this month. The government had sought to avoid federal intervention by lining up private companies to rescue AIG. But the effort failed when companies were unwilling to take on the massive financial risk, forcing the government’s hand.}

^{AIG found itself on the verge of bankruptcy because of mounting losses from investments tied to subprime home mortgages and also from the insurance it was providing to others who invested in mortgages. When credit-rating agencies downgraded the company Monday, AIG suddenly faced a crunch to come up with $14.5 billion to meet its commitments. If the company failed, it could have set off cascading losses across the global financial system.}

^{"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"…}

Finances and Financial Markets are mumbo-jumbo to me – mostly about rich people getting richer. But this one seems to be pretty simple at its core. The people who bought the homes that they couldn’t afford are losing their homes. But the people who loaned them the money to buy the homes they couldn’t afford, or insured the loans that they gave them to buy the homes they couldn’t afford, or invested in the companies that gave or insured the shaky loans to the people who bought the homes that they couldn’t afford, must be protected…

McCain Embraces Regulation After Many Years of Opposition

^{A decade ago, Sen. John McCain embraced legislation to broadly deregulate the banking and insurance industries, helping to sweep aside a thicket of rules established over decades in favor of a less restricted financial marketplace that proponents said would result in greater economic growth.}

^{Now, as the Bush administration scrambles to prevent the collapse of the American International Group (AIG), the nation’s largest insurance company, and stabilize a tumultuous Wall Street, the Republican presidential nominee is scrambling to recast himself as a champion of regulation to end "reckless conduct, corruption and unbridled greed" on Wall Street.}

^{"Government has a clear responsibility to act in defense of the public interest, and that’s exactly what I intend to do," a fiery McCain said at a rally in Tampa yesterday. "In my administration, we’re going to hold people on Wall Street responsible. And we’re going to enact and enforce reforms to make sure that these outrages never happen in the first place"…}