Explain to me: Federal Bank Bailout

[asterroc]

Oh wise LJ-friends, explain to me this Feds bailing out / buying out the banks thing. Preferably in 3 sentences or less (so as to boil it down to what's most important).

I really do appreciate y'all's ability to boil down these topics I find remarkably complex and filled with too many details for me to grasp, into simple "here's what's important about the thing, and here's what you can ignore" sort of summaries. And I've a tag for them too.

So. Fannie May, Freddie Mac (what's with the names anyway?), and AIG. Three sentences. Go!

Comments

[marquiswildbill.livejournal.com]

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).

[rubicat.livejournal.com]

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

[q10.livejournal.com]

it's all about calming the herd.

[parrot-lady.livejournal.com]

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.

[spazzy444.livejournal.com]

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.

[galbinus-caeli.livejournal.com]

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

[sirroxton.livejournal.com]

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.

[caprising.livejournal.com]

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

[(Anonymous)]

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.