♠ Posted by Emmanuel in Casino Capitalism at 9/17/2008 06:00:00 PMThe picture here depicts insurance policy holders in AIG's Singaporean subsidiary taking whatever they can from the stumbling institution. What can I say? These Singaporeans are well-advised to cut their losses to AIG given who owns it now--the US government. Given America's bludgeoning deficits, can you blame these Singaporeans if they lack confidence in Uncle Sam's financial management skills? As Nouriel Roubini intones, the United States cannot indefinitely continue bailing out failing financial institutions lest it become insolvent itself. In effect, American shareholders are being made to foot an open tab without clear limits:
This latest action on AIG follows a variety of many other policy actions that imply a massive - and often flawed - government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (restrictions on short sales); the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market); the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the TSLF and PDCF facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).The US Treasury has just announced that it will mount an auction to replenish the Federal Reserve's balance sheet, damaged as it has been by mopping up the financial system's variegated detritus in exchange for T-bills. So, it will soon auction $40 billion worth of 35-day (short-term) bills. Notably, Bloomberg implies $263 billion worth of Federal Reserve "investment" in assorted assets of dubious worth through the assorted facilities mentioned earlier:
Fed holdings of Treasury securities have fallen to $478 billion as of Sept. 10, from $741 billion at the beginning of the year, as the central bank has made room on its balance sheet for the new lending facilities.And there is more in store. As I said, it's an open tab at taxpayers' expense:
Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.America's deficits were already huge without having to account for these assorted bailouts. A country that already relies on the kindness of strangers to keep it afloat can only resort to borrowing even more in the event of further valiant but wrongheaded and ultimately unsuccessful attempts to salvage a subprime financial system. Given that foreigners are becoming warier of investing in America, will aversion increase in light of current events? The US can try to bail out the whole damn banking system if it wants. The real question, though, is the above: But who will bail out America?
UPDATE 1: Is there no limit to the amount of handouts the US government will give? Reuters now reports that Detroit's Not-So-Big Three have successfully petitioned the government to lend them $25 billion in a sweetheart deal. If you recall, borrowing costs for GM and Ford went through the roof when their debt was downgraded to junk. Voila! Sammy to the rescue
UPDATE 2: Ken Rogoff has a new op-ed out in the Financial Times which appeared after this posting that suggests his thinking is similar (HT: Trade Diversion). First, the US has already spent between $200-300B on subprime-related activities. Second, the ultimate tab should amount to about a trillion (if not more), necessitating a foreign "bailout" of Uncle Sam. Third, it is odd that the dollar has been strengthening, although I must point out the euro staged a strong rally yesterday along with gold.