The Federal Reserve, faced with the imminent failure of insurance giant A.I.G., effectively nationalized the company by giving an 85 billion dollar loan to the company in return for 80 percent of its stock. In a statement the Fed Board said:
“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.
The washington Post reports that the government felt that a failure of AIG at this point could have potentially dire consequences in markets where AIG has become a major player. From the Post:
Government officials drew two distinctions between AIG’s situation and that of Lehman. First, ever since the demise of Bear Stearns in March, the government and private firms had been drawing up contingency plans for easing the collateral damage from a Lehman bankruptcy filing. AIG’s failure was a surprise — the company first went to the government for help Friday — and its sheer size and complexity made it impossible to quickly prepare for its collapse.
The other difference is that AIG does business in ways that get to Americans’ pocketbooks. Its short-term debt is held by institutions all over the world, including money-market mutual funds, and its overnight collapse could have caused big losses in those funds, perhaps even risking a run on them.
As the carnage continues on Wall Street both presidential candidates talked of the need for effective government regulation. But how did we get into this mess in the first place? We are here at least in part due to this ideological zeal to do away with government regulation of financial markets. The Gramm-Leach-Bliley Act of 2003 gave significant relief from traditional government regulation of financial markets, and tore down walls of separation designed to avoid the type of calamity we are facing today. From the Washington Post:
Three years earlier, McCain had joined with other Republicans to push through landmark legislation sponsored by then-Sen. Phil Gramm (Tex.), who is now an economic adviser to his campaign. The Gramm-Leach-Bliley Act aimed to make the country’s financial institutions competitive by removing the Depression-era walls between banking, investment and insurance companies. That bill allowed AIG to participate in the gold rush of a rapidly expanding global banking and investment market. But the legislation also helped pave the way for companies such as AIG and Lehman Brothers to become behemoths laden with bad loans and investments.
Deregulation designed to lift the sleepy and safe rate of returns that for years had been satisfactory to financial investors across the world. In return for the potential greater upside the government allowed a degree of risk into the system that has brought us to today. When ideology trumps good policy the results are not often pretty.
I wonder if the theory that we can run fiscal deficits of 500 billion a year as well as enormous trade deficits forever without impact is now going to be examined as well.
Bill Manzi.com 
Your half truth entry.
“But how did we get into this mess in the first place? We are here at least in part due to this ideological zeal to do away with government regulation of financial markets. The Gramm-Leach-Bliley Act of 2003 gave significant relief from traditional government regulation of financial markets, and tore down walls of separation designed to avoid the type of calamity we are facing today.”
Well to finish the story 90% of the Senate voted in favor of the act including Harry Reid and almost all the Dems. To finish you half truth the billed was signed by…………….wait for it……………..Bill Clinton. This was a bi-partisan effort, which may have looked good at the time.
By the way, what did you friend Barney Frank do to head off the Fannie May failure?
Dems ain’t innocent.
Jules
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Lets first deal with the Gramm-Leach-Bliley Act, and your contention that Reid and most Dems voted for it. The source of your contention is the Wall Street Journal. Unfortunately the Journal got it wrong.
From the Daily Kos, who first quoted the Journal story author James Taranto, who Jules cites in his post.
Taranto apparently used as his citation the Senate vote on the conference report, which is plainly the wrong citation. He should have used the Senate vote on the bill itself. The Daily Kos posting, continued below, corrects Taranto and shows the story to be totally bogus. The only Democrat to vote in favor was Ernest Hollings of South Carolina. The entire Senate roll-call on the bill itself is below. Sorry Jules but the Journal blew this one. This is a Republican bill, passed by a then Republican majority.
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Your Honor,
I checked and you are right about the vote being along party lines. Bill Clinton did sign it. Why didn’t he Veto it?
The problem started when the Dems began pressuring the banks to lower requirements to give the poor folks a shot at home ownership. This is includes Barney Frank, who failed to recognize this problem. Then everything ran away as billions were fed into the system.
Now the “Internet Bubble” is re-enacted with similar results except larger.
Greed, yes. (Huge amounts of Money will always corrupt the system- Check out the Big Dig) Government interference (forcing banks to expand mortgages to those who should not have one).
You will never convince me that deregulation itself cause this.
Your time is here. Should pull away from McCain.
Jules
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Jules,
Clinton should have vetoed the bill. He was in error to sign. Bob Rubin, his Treasury Secretary and head honcho at Goldman Sachs, was a supporter of the bill.Wall Street even penetrated Democratic Administrations. In Rubin’s defense the Clinton Administration turned from fiscal deficit to fiscal surplus. The insane fiscal policies followed by George W. Bush have turned most of the Clinton/Rubin good work to ashes.
I also agree that the Fannie and Freddie mess can be partly laid at the feet of Democratic politicians who resisted real reform (or abolition) of those entities. Of that there can be no doubt. I do do deny the obvious. But the Fannie and Freddie mess has been made into a systemic crisis by new financial instruments unleashed by Wall Street that have had NO REGULATION. Fannie and Freddie utilized those instruments to further leverage themselves and make a potentially bad situation worse. And Blue Mass Group has reprinted the following from Warren Buffet’s 2002 annual report (Berkshire Hathaway):
This danger has been forecast by some, and ignored by most. Yes Jules deregulation is mostly responsible. Greed was the motive, deregulation the tool to achieve higher and higher rates of return on instruments that to this moment are not fully understood. The danger was ignored and poo-pooed because everyone was making money. (Including politicians cut in on lucrative business deals). As I have mentioned the financial dangers that the system has been facing you have also poo-pooed them, essentially saying that the laws of math don’t apply to the United States and its economy. There is more shaking out to be done, and I hope ideology does not trump good management.
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Your Honor,
Barney Frank and others, for political reasons, pressured the banks to expand mortgages to the “poorer” people. Good financial requirements were replaced by just being there. All hell broke loose and every one did the “internet bubble” thing with billions accumulated, bundled and re bundled.
Like the Internet, the mortgage bubble burst with far reaching affects. No economic melt down.
The problem is not deregulation, it is political interference.
I notice that Chriss Dodd and Barack Obama received most of the political money from the institution now in trouble. McCain only $21,000. Your guys well over $300,000.
Hmmmmmmmmm.
Jules
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Jules,
Your post is riddled with so many errors that it is difficult to know where to begin. Lets start with the “internet bubble” that you continually refer to because you think it happened on Clinton’s watch. (But you are not repeating Republican talking points!) The Internet bubble was the overvaluation of internet based firms on the “free market”. Market participants drove some of those stock prices to levels not justified by any economic formulas that were familiar to economists. Many investment bankers poo-pooed the questioning of such values, saying that the traditional valuation methodology was gone, and a new valuation paradigm had been created. Just like the Republican idea that economic iron laws do not apply to the United States government because “we are the United States” this new paradigm was shown to be snake oil and the “free market” made its correction. To my recollection Jules no Internet company was nationalized and no federal money used to bail out failed internet companies. They just failed, and values decreased to levels based on sane valuations (they actually had to earn money).
Your attempt to lay this whole thing at the feet of “political interference” would be funny if the results were not such a disaster. Fannie and Freddie grew into extra large sized behemoths as PRIVATE companies through the use of leverage that was provided through the securitization of mortgage debt, including sub-prime. Wall Street provided the new tools, and the Republican Administration and the 5 years of Republican majority Congress did nothing to restrain these new instruments of leverage. On Fannie and Freddie no question that many Dems in Congress got it wrong. Unlike you and Republicans I do not deny when members of the Democratic Party are in error. But it was the Bush Administration that nationalized these private companies when they teetered. Was that the wrong call, or the right call? I still don’t know John McCains position.
As far as you now painting a rosy picture because the stock market rallied on Friday that is just typical of Republican misspeak. The Federal Reserve Bank of the United States expends 800 billion and runs out of cash (to be re-capitalized by the Treasury, who will borrow from China and Russia to do so)and you say that a stock market rally means everything is ok. WOW! Even for Republicans in desperate denial that is some statement.
Finally Jules I have not heard you comment on the nationalization of major segments of the U.S. financial markets. I thought Republicans were for letting “free markets” operate. Maybe I am confused, and that Republican principle goes back to the days when they favored balanced budgets as well. I guess the new Republican idea is “privatize profits, socialize loss”. Pretty good idea for some. For the rest of us not so good.
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Taxes must be frozen or raised.
Spending must be frozen or reduced.
Democrats and Republicans alike contributed to this mess with feel-good policies. Yes…Clinton had a surplus, but sent us into recession at the end of his term…(he also signed the bill deregulating investment banks).
BOTH PARTIES ARE TO BLAME! We have no statesmen…only mouthpieces for special interests.
Run, someone, anyone…run!
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