[glen]

Feds to lend up to $85B, get 80% stake in AIG in return (just for a loan) - are they doing the right thing, the best thing, or the wrong thing?

Imo, this is buying the barn door.

[mike777]

"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 (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the"
http://money.cnn.com/2008/09/16/news/compa...sion=2008091621

The fed gets 11% at today's rate on the loan. AIG has a trillion bucks, that is alot, in assets.

Academics can and should debate this but it is a done deal.

I think this could be a very good deal for the government in many ways besides a simple profit.

I grant these assets may fall further, now we will see if 85$ billion and whatever they can get from other souces is enough liquidity to ride out the hurricane.

[PassedOut]

I trust that a lot of us have done well with short positions over the past few weeks.

[mike777]

Hank Greenberg who built AIG is on Charlie Rose now.

His take is most of the company is in the insurance business.....and it is doing fine.
One part is called AIG financial products......let us assume noninsurance.

This one division is killing the company. Exactly how is unclear but assume they took on a bunch of assets that are falling in value and liabilities that are increasing causing a liquidity problem.
If this sounds unclear..it is. Somehow ..someway, somehow the risk managers and ceo failed.

His solution.....large bridge loan( before fed announced) to create liquidity but do not wipe out shareholders(him 12%). Sell assets(divisions)...raise capital...

[Al_U_Card]

Sadly, we are beyond the days of "you work for $10 and then you can spend $10 on what you need or want to buy".

The arcane skullduggery that passes for finance today is only exceeded in complexity and mystery by it's proponents abilities to exploit the gullible and to make out like bandits...

[y66]

It looks like the barn door metaphor lost out to the domino metaphor.

So, where's the light at the end of the tunnel?

Don't ask!

According to Nouriel Roubini, commenting on the News Hour with Jim Lehrer Monday night:

Quote

It's not just about housing. This is a severe economic and financial crisis. And the only light at the end of the tunnel so far is the one of the incoming train wreck, unfortunately.

Roubini is the chairman of the consulting firm RGE Monitor and a professor of economics at New York University's Stern School of Business.

BTW, here's the FRB's press release on the AIG "bridge loan".

[Al_U_Card]

They pumped the housing bubble to maintain the illusion of prosperity. It was only a matter of time as it is with all speculation....but this time, we are on the hook....again.

Housing price index (inflation adjusted)


There goes my vertigo....

[pclayton]

Al_U_Card, on Sep 17 2008, 06:43 AM, said:

They pumped the housing bubble to maintain the illusion of prosperity. It was only a matter of time as it is with all speculation....but this time, we are on the hook....again.

Housing price index (inflation adjusted)


There goes my vertigo....

Nice graph, but it doesn't take into consideration that home prices have already dove over 30% in many markets. When you take this into account, along with the background inflation over the last three years, that brings the index more into line.

[Al_U_Card]

Hey Phil

You sure on those numbers? Inflation at 2% and a 30% correction leaves about 45% to my mind.

Either way, it is clear that the housing "bubble" was way out of line with other historic variations (no great depression, no world war.....but not for lack of trying).

When you can see it in retrospective....it seems obvious....and people all "knew" it...but it is so hard not to hope for it to continue, especially when the "volatility" is all on the upswing...

[mike777]

When if comes to housing alot of people forget to factor in all the money and work that people put into a home. It is alot more than zero. A house that costs for 100, 000 and sells for 150,000 may in fact be sold at a loss after you factor in all the money that goes into a house and land after you buy it.

[cherdano]

Btw, if I understood right Jimmy Cayne will get a new job at AIG as part of the deal.

[Lobowolf]

From purely an investment standpoint, though, also worth keeping in mind the mortgage interest tax deduction.

[pclayton]

Al_U_Card, on Sep 17 2008, 10:08 AM, said:

Hey Phil

You sure on those numbers?  Inflation at 2% and a 30% correction leaves about 45% to my mind.

Either way, it is clear that the housing "bubble" was way out of line with other historic variations (no great depression, no world war.....but not for lack of trying).

When you can see it in retrospective....it seems obvious....and people all "knew" it...but it is so hard not to hope for it to continue, especially when the "volatility" is all on the upswing...

Not sure what you're saying Al. The graph shows no change to the index.

If Inflation is 3% (too lazy to google this) and housing growth is 10% / year, the index would reflect a net 7% increase. This is basically what happened from 1998 to 2005.

But if inflation is still marching along (call it 8% total the last three years), and we have a housing decline of 30%, that's a real change to the index of 38%; or 76 points. That puts us at 124 or about the top of the late 80's cycle.

By the way, there is no reason that housing should be on par with inflation, over the last fifty years. Four factors:

1. Home mortgage deduction, which still makes home loan money cheap relative to its pricing risk.

2. Baby boomers buying houses over the last 20 years increasing demand over the prior 20 years.

3. Relative shortage of homes being built relative to demand. In California, we were undersupplying the market by about 130,000 units in 2005. This is largely due to regulatory hurdles.

4. Federal Highway Act of 1956. As transportation was able to branch out, cheaper land was available, and cheaper housing. The American Dream became a reality for many, even if it meant a one hour + commute.

[mike777]

Lobowolf, on Sep 17 2008, 02:23 PM, said:

From purely an investment standpoint, though, also worth keeping in mind the mortgage interest tax deduction.

True but that extra cost, interest cost, is still more than zero after taxes.

that 100,000 house for almost all of us costs a heck of alot more than 100k

Also keep in mind a heck of alot of people are highly leveraged.....zero percent down...5% down 10% down.......etc.......factor in taxes.....after tax interest cost, upkeep on house and factor in 30% drop or whatever......and ....

[Al_U_Card]

Well, the graph is inflation adjusted. Most cannot find a house at 100K (small bungalow needing work in a run-down neighbourhood maybe...)

Still,as a comparison, it is clear that the last run up was significantly outside of the "usual" range after inflation was taken into account.

[y66]

Nice graphic Al.

The methodology that Shiller et. al. (a different Al) are using seems pretty reasonable to me.

Details available in wikipedia.

[Mbodell]

patrick.net is the best site on the web for this information IMHO.