asterroc | Explain to me: Federal Bank Bailout

Basically all of these financial companies are taking a beating because of the sub-prime mortgage crisis, which in turn effects all of their other lending. Then the insurers like AIG who had insured the mortgages started taking a beating, and they had to put up more collateral as they were paying out a lot on the mortgages they had underwritten. So all of these major companies are dragging the stock market, and consequently all of our economy down, which makes everything worth. The government had to step in to prevent a financial collapse, by bailing companies out and issuing a ten day ban on short selling stocks (which would drive everything down as well), the likes of which has not been seen in 79 years.

That was 4 sentences, and is really simplistic. The ultra simplistic one sentence response is: They had to do it because all of these major financial institutions where going to tank and the US economy was going to resemble the Afghani economy without someone stepping in to stop the losses.

Frannie May and Freddie Mac are government subsidized lenders for student loans and low income mortgages, the government is pretty much obligated to bail them out anyway. Even so it's going to be really hard to get student loans and low income mortgages for awhile. It's going to be a bumpy two years. Keep your 401K contributions at the same rate (they're buying more now and they will adjust as the market corrects itself), but any investments you have that aren't in guaranteed CDs get out of and keep the money in cash in an FDIC insured savings account (if you have more than $100,000, split it into multiple accounts at different banks b/c FDIC only covers 100k).

A good summary--thank you.

Also your icon looks like the inside of a migraine. (Which I say to mean it's cool to see that pattern outside my head and without the accompanying pain, not that it gives me a headache.)

I just like it because it's trippy. Granted it's kind of like what bright white looks like to me. I don't see solid color without my brain injection noise into it.
I don't visualize a migraine as looking like that. In fact I don't think I can associate an image with a migraine. The closest to a visual I could give is a feeling of almost electrical pain in my optic nerves, especially if there is light. I personally find the nausea/vomiting from a full on migraine to be worse than the pain. Then again I'm a chronic pain patient so I'm used to pain (or coping with it at least), and I always have pain meds in my system. Whereas I don't handle vomiting well. And it seems like every time I have severe nausea/vomiting I either have no zofran or i forget I have it. I usually manage to catch a migraine before that starts and I can take action to keep that from happening. But I have been getting migraines a lot more frequently in the past year (from 2-3/yr to about once a month, including two that totally incapacitated me for a period, one of which I nearly went to the ER over because the nausea was SO bad. I probably should have because I was so weakened from vomiting all damned night. And a shot of zofran or phenergan and IV fluids would have taken care of that nicely.)
I'm glad you found my summary useful.

It sounds like you're saying "failure of a few banks due to housing loans" inevitably turns into "failure of all retirement plans". I'm not getting that.

No I actually said 401k will remain safe because it is a long enough term investment for young people that it will recover from this.
What I was saying was that the chain collapse of large financial institutions would create a panic among investors, leading to a loss of market confidence, and a downward spiral of the stock market in general. That is why the government had to step in, to halt a chain reaction. Some major players have already been brought down. And more would follow w/o a government intervention. Hopefully the SEC will make new rules to keep this from happening.
I personally blame out of control oil speculation for being a major part of this starting, it shifted the economic balance further than it could go.

CEO's: greedy.
The banks became needy. We
got stuck with the bill.

I like the haiku format.

oh, very nice :)

it's all about calming the herd.

People are stupid, greedy, and.... ignorant. when they see "zomg the bank is running out of money...." they need to be fed, like the stupid sheep-ole they are.

I agree that people are greedy and ignorant, but the fact remains that if the collapse of financial institutions in america keeps going unchecked we're heading for another depression. Hopefully after this has gotten under control the SEC will make regulations that will reduce the chances of this happening again.

I only know about AIG because I basically had to listen in on a conference call presented by Marsh (huge, nay one of the largest brokers) for my boss and write a summary on it.

Basically -
AIG, inc. is the parent/holding company of many other companies, specifically insurance companies. AIG, inc. does not insure anything...it invests.
It lost a lot of money in the stock market/investments.
The subsidiaries that are insurance companies are FINE, in fact they are pulling in substantial profits. Before the fed bailed them out but after they made note of their issue it still had a S&P rating in the A's as did all the subsidiaries.

so 3 or less sentence version:

AIG is an investment company that is the parent of several insurance companies. Investments lost money, insurance made a profit.

My explanation was a bit longer than that. But still pretty succinct I think.

Direct link for my reference. http://galbinus-caeli.livejournal.com/207709.html

So what does all this mean for the future of our economy?

Sorry, I meant to make that a direct link.

What will this do for the future? That is the $64 question.

In and of itself, not too much. Some poor and middle class people will lose their homes, but they were losing those anyway. Some rich people will lose some value out of their portfolios. All of us will have a government that is a little bit more in debt, but no more than the cost of a month of the Iraqi occupation.

On a larger scale the loss of these firms will result in what they call a "tightening of the money supply". Basically that means that credit should be a bit harder to get, mostly for the big banks and financial organizations loaning money to each other. This theoretically means fewer big capital purchases (new factories, companies buying each other). But predicting how this will actually play out is really a job for big economic brains.

The most interesting aspect of this is that the government now has direct control of the two agencies that guarantee home loans in the US. Fannie Mae and Freddie Mac were highly regulated private corporations, they are now government agencies. But again, exactly what this means is a question for experts.

The short form of all this is that regulation policies for these industries have failed. These huge essential organizations are supposed to be regulated like utilities so they don't fail. They have, which means the regulatory policies failed.

I guess what I'm wondering now is I hear lots of people (such as

marquiswildbill, above) saying this is a sign of the horrible recession we're in, and that it's going to snowball into massive bank crashes. Is that likely? How do we get there from here?

In my slightly informed opinion, no, this is not going to lead to massive bank crashes. The ones that are crashing are ones that were out on the edge of what they have been allowed to do. They are being bought up by the ones that have been more conservative (in a good way). Notice how Bank of America, Suntrust, and First National Bank of Omaha are buying up all these failed banks. Account Holders are going through brief periods of loss of services (including access to their funds) but no one with less than $100,000 in a single account is going to lose any actual money. They will end up with a new bank, and will probably have new atm cards issued to them, but they won't even have to have their checks reprinted.

Credit is already tighter for consumers than it was a few years ago, and I expect that trend to continue. Cheap home loans are gone and they aren't coming back. Quick flip "investment" properties are going to be a thing of the past. But these are all corrections, they were poor ideas in the first place.

Of course without more corrections from the top, this is not going to happen quickly or cleanly. And unless the real core problems of our economy not corrected the slow decline of the last twenty years will continue.

Unless we fix the problems with foreign trade and guest workers we are going to have a very hard time recovering.

Every dollar we send overseas is gone. A dollar spent locally is recycled.

Let me give an example. If I buy a tomato imported from Mexico, that dollar goes to Mexico and does me no more good. If I buy a tomato from a local farmer, he is going to use that dollar to to pay for fertilizer from a local hardware store, who pays a clerk who works in my neighborhood, who buys CDs produced by a local band, who keep people coming into my local bar, where I can buy beer. That local tomato helps keep my local economy going.

The same is true for a guest worker. If I pay a guy from Mexico (I am not picking on Mexico, it is just an example) to mow my lawn or fix my roof, he is spending the minimum he can on an apartment he shares with nine other guys and sending most of the money I just paid him back to Mexico where he can support his wife and three kids in a much better lifestyle than if he worked and lived at home. If he instead immigrates to my neighborhood, all the money I pay him is used to buy a house here and shop and pay taxes here, and send his kids to school here where they can be the person to cure cancer.

Basically we need to choke down on foreign trade. Charge tariffs for imported articles, and find ways to reduce guest workers. If people want to work in the US, they should typically live here.

Anyway, sorry for the sermon.

Gotta run, so I'll try to give you a handy intuition.

There's a lot of money saved in the world - about 70 trillion dollars, 7x the national debt, and 5-6x the GDP. That number has been growing astonishingly over the past several years.

Keep in mind, that is *saved* money, for things like pensions, insurance backing money, and personal bank accounts. That money has to go someplace safe.

US bonds are considered safe because the government can tax the citizenry, but bonds aren't the only safe investment. The US financial industry offers a lot of other safe financial products.

In fact, US financial products are so well loved that foreign companies are willing to sell goods cheaply just so they can take your dollars and sink them into those products.

So what happens when those "safe" investments prove not to be so safe? The demand for US financial products goes south. Foreign holders take their money out of US financial products. Now 1) Sony is less interested in your dollar because it can't buy good financial products and 2) the market is now flooded with dollars that were dumped by the financial industry, and your dollars have to compete.

Keep in mind, the flexible liquidity-injection system that allowed the Fed to react to the subprime lending crisis is based on having buyers for our bonds.

Devalued dollar, no liquidity, hell on earth.

The good news is that if we manage to avoid this purported apocalypse, the US taxpayer will actually make money on the AIG bail-out. The government is charging AIG over 11% interest. AIG has $150 billion worth of good assets, and this loan will give them 2 years to sell that off in an orderly fashion and pay back the government.

Hmm the first major thing that I think is likely is that dollar could lose value, maybe a lot. If the government has to spend umpteen-billion dollars there are only really three places to get it:
(1)raise taxes
(2)print more currency
(3)sell stuff

(As far as I know the government hasn't *actually* paid any real money, they have only committed to spending money if other people fall through.)
Right now, people in other countries use/accept American dollars because they trust that it will retain its value. If the dollar gets devalued significantly it could lead to more foreigners buying U.S. companies, and more foreigners not using U.S. currency.
Ok I guess I am a little over my 4 sentence limit, hope that helps.
:)
MJ

Restore confidence in the US housing market.
Prevent a domino effect.
Preserve livelihoods.

The govt isn't bailing them out per se though. It's lending AIG 85bn @ 11% interest and taking a 79.9% controlling stake in the company. The terms are just as bad for Fannie and Freddie. The hope is that over time the govt will recoup all of its investments, ala RTC (and what they're looking to establish now in congress with 700bn in capital) in the 1980s for fixing the Savings and Loan crisis.

Fannie Mae / Freddie Mac:
1. A lot of foreign institutions own their paper. If they dumped it, they'd probably start to unload other US paper (treasury bonds)...
2. Provide liquidity for loans / mortgages. Nobody was lending.
3. The two are govt sponsored... If the govt let it fail, the world would look unkindly on the US...

AIG (if it went into bankruptcy):
1. AIG is the largest insurer in the world
2. A lot of people wouldn't be able to cash in their insurance policies.
3. A lot of businesses would suddenly be exposed to liabilities because they're no longer insured (especially where things are required to be insured). This could potentially cause them to fail, potentially causing a domino effect.

Explain to me: Federal Bank Bailout

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