The reasoning went like this: the Fed refused to bail out Lehman Brothers because they gave the government plenty of warning about their potential collapse. Because AIG waited until the last minute to let the government know about their predicament, the Fed had to bail out AIG and essentially nationalize it, making the US government the world’s largest insurer. Ed

I disagree on this one. If you examine the WSJ article you will see why.

That the government would prop up AIG financially offers a stark indication of the breadth of the insurer’s role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world.

For one thing, banks and mutual funds are major holders of AIG’s debt and could take a hit if the insurer were to default. In addition, AIG was a major seller of “credit-default swaps,” essentially insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses WSJ 9-16-08

If AIG failed it could crash a lot of banks.

Secondly, AIG has a lot of assets but could not meet a cash call. That is different from a stupid bailout. That is propping the company while it sells assets to pay the calls.

At this stage it doesn’t matter if they were worthy. If AIG fell the next part to fall would be the small investor and his IRA’s.

The Bear Sterns rescue was also for the same reason. At that time a publisher of a financial newsletter I read saw a nation about to flat line at the possibility of Bear Sterns sinking.

Right now Treasury is deciding who can get on the lifeboats and is saving the ones that might keep the boat afloat. (I keep saying Treasury when I mean also the Fed, and the guy with a plan to stop the Depression)

If AIG had not been propped we would be reading news reports like those coming out of Russia today.

That the government would prop up AIG financially offers a stark indication of the breadth of the insurer’s role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world – WSJ

Note the word “dominos”

Few people know the Chinese markets tanked a while back about 40 percent. It did not hit the same because China sits on a trillion US dollars and that nation will put a bullet between the eyes of anyone who makes noise anyway.

We are being told the Russians and Chinese are rich and we are poor. They may be rich but you can’t eat oil and you can’t eat Chinese cheap laborers (not yet anyway). And they can’t eat US dollars if our dollars turn to dust.

entagor on September 17, 2008 at 9:00 AM

I want to add a few quotes from a great article by Max Whitmore in moneynews.com (a Newsmax publication)

In “The Greatest Bank Robbery in History” Whitmore writes that after the crash of October, 1987

I can only speculate on what happened next. Somewhere in that period, Mr. Greenspan decided that this “unwieldy” collection of banks needed to be “streamlined” (my choice of words). I believe that, at some point, he called in the 15-20 largest banks in the U.S. and said something like this: “I believe that this country needs far fewer banks in order to control the system more efficiently. I want you all to feel free to pursue whatever steps you feel necessary to consolidate the banking system over the next five or 10 years. You will have my full, but publicly unspoken, support. Just get the job done.”

Now, these are my conjectures, but let’s look at what happened over that next decade or so. For all practical purposes, the “small town” bank disappeared. There emerged about 15-20 really big banks that swallowed whole thousands of small banks and formed what I can only call an oligopoly.

then Whitmore surmises

With it went Middle Americans’ control over their resources and how those resources might be used. In other words, Middle America became a cash cow to the super banks’ whims of asset allocation. Big companies get preference and the little guy — well, maybe you remember the TV ads. It was the biggest white collar crime of the century in my book.

this changed the landscape of America

All loan controls fell to the hands of this exclusive group of bank managers and presidents. The super banks wiped out the decades-old structure of financing that had built the strongest economy in the world. In its place it installed a “one size fits all” type of banking.

We can see the results in the small towns all over the country. Small business has basically disappeared.

He describes how the super banks set up penalty fee systems soaking the little guy of $36 billion yearly in penalties.

It is a great article documenting what snuck up on us. Now the super banks can cause super crashes. Instead of many small dominos we have monsters with tentacles who pull down skyscrapers when they fall

entagor on September 17, 2008 at 9:19 AM

One last point. The small guy is being blamed for getting greedy and using ARMs to buy houses he could not afford.

In my area, most small guys were herded into arms by the mortgage brokers including the ring-a-ding big brokers on tv. They were told this was all they qualified for on small homes that they really could afford. And at this time, rents were high not low and prices rising

In SE Michigan it was very very hard to get a fixed rate mortgage on a cheap home unless you were so solvent you would not have wanted a cheap home anyway.

But the little guy with the little Arm house could lose his job and find his little house took the same drop as all homes in his area.

The famous mobility of the American worker died just as illegals were imported in droves into Michigan to suck up the low level construction, cement, carpenter, road crew, garbage collector, hotel maid, food service jobs that were the life savers of a trapped worker

I know these people. I saw people taken out by penalty interest on loans. My solvent careful elderly crippled aunt needed a furnace and used a VISA check. She always mailed her payments immediately but the bank alleged one payment was late. She went into 29.99 percent interest and told me she could only make the interest payments for the rest of her life.

Stand in a supermarket and hear this story over and over again by people not living high on the hog but people working their fingers to the bone.

The ER bill for three stitches on a cut is $1000 and it goes into collection in two months. When collection hits the VISA card is re evaluated and the bad risk 27-29% interest applied. The only way not to pay the higher interest is to freeze the card. Now there is no credit left for the next emergency.

THis is everywhere in Michigan as the big bank buzzrds feast on the bones of people who were not greedy and did not have granite countertops or fancy lives

entagor on September 17, 2008 at 9:36 AM