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Archive for the ‘the Federal Reserve’ Category

>Can The Fed Bail Out An Insurance Company?

>Readers must distinguish the Fed, an instrument of government but technically not part of it, in regulating monetary policy. Distinguish the Fed from Hank Paulson who is President Bush’s Secretary of Treasury. Remember that the Secretary said the government would not bail out the world’s largest insurer, and it didn’t. It appears that was left to the Fed.

The interesting thing about what I call a huge mistake is this: When you consider who oversees American International Group (AIG) you go back to the State of New York’s Insurance Department. Something to understand about insurance companies–and I don’t care how big they are, whether they’re huge like State Farm Mutual and AIG or some little Podunk Mutual in Sorrysville, Alabama, in America they are regulated by state insurance departments. The irony is this: Despite the fact the Feds have no jurisdiction over AIG, they came in with federal funds to bail them out.

New York Governor David Paterson is happy to shuffle this big problem off on someone else and seems pleased the Fed is loaning AIG $85 billion.

Though Hank Paulson of the Treasury Department seems to be going along with it, I find this quite extraordinary and there is an awful lot of impropriety in this. Are we getting to the stage in the financial world that an agency of the Federal Government that is not part of the government must take regulation of insurance away from the states? If so, there’s a legal backlog of thousands of pages of record showing they have no business doing so. This is an old states rights issue and what has happened with this takeover is the precise thing we’re talking about–a takeover of regulation of one insurer. Because you can’t see the Fed just idly sitting there letting AIG do something that is not in keeping with “the Fed’s good judgment” now can you? This whole thing is a mess. It reeks of socialism at its worst.

The Fed has fired all of AIG’s management. Edward Liddy, the former head of insurer Allstate Corp (ALL, Fortune 500)., will lead the company, the Wall Street Journal reported.

Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they had to act lest the nation’s largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won’t have to go through a tumultuous fire sale.

Can you imagine the Federal Government, the new owner of AIG, now being regulated by the State of New York? But that’s precisely what has happened. Or has the Fed placed AIG in the same company as Social Security with all of its stumble-bum decisions? One difference, since the Fed did this, anything they do cannot and will not be subject to presidential or congressional oversight. Can a state legally oversee the Federal Government? With AIG, a best case can be made that the state is the only jurisdiction that has the power to do so.

Even a better question: We know AIG didn’t go under because of its superior insight and management ability. When we the people now own the giant insurer with liabilities estimated at more than $450 trillion, what happens to “we the people’s” pocketbooks if this stumbling giant continues to stumble under Federal Reserve Board oversight? AIG will continue to fail and must sell off assets to pay us back plus about 13% interest. But what if it doesn’t work the way Bernanke envisions?

Who then will bail out the taxpayers who will be called upon to come up with that $450 trillion–assuming, of course, all of AIG’s invested reserves also go curplunk? What we have been doing to less developed nations (LDN) for years and years is coming home to roost. Through companies like MAIN, and Halliburton many LDNs have mortgaged their souls to the devil in the name of U.S. imperialism and our effort to create international empires.

Ecuador is a good example of a poor nation developing oil wells, oil lines, and building power plants, roads and other infrastructure for which their leaders have sold their people into bondage. They can never live long enough to pay it back. Third world debt has grown to more than $2.5 trillion, and the cost of servicing it–over $375 billion per year as of 2004. It’s more than all third world spending on health and education and more than twenty times what developing countries receive annually in foreign aid. Over half the people in the world survive on less than two dollars per day, which is roughly the same amount they received in the early 1970s. Meanwhile, the top 1 percent of third world households accounts for 70 to 90 percent of all private financial wealth and real estate ownership in their country; the actual percentage depends on their country (James S. Henry, “Where The Money Went,” Across The Board, March/April 2004, pp42-45. For more information, see henry’s book: The Blood Blood Bankers: Tales from the Global Underground Economy (New York: Four Walls Eight Windows, 2003).

The reason I mention third world countries is because they don’t have money and have become indebted up to their ears. We Americans are quickly following in that pathway. Our country is broke and our leaders don’t know it. If they do they’re not telling. Isn’t it about time we elected a president and Congress with conservative values?

To my question about who will bail out us taxpayers, the answer is no one. We’re the pocketbook of last resort. Maybe we could call up King Abdullah bin Abdul Aziz Al Saud. He could help, but would want the State of New York in exchange. Or, maybe Hank Paulson can help. He knows a lot of people in China because he was a good Boy Scout; he could talk to Chinese President Hu Jintao. Maybe good old Hu could bail us out. But he would want the State of California.

Good, give them California and New York. Let Hu deal with the Spanish immigrant problem. Good, give them New York. Let King Abdullah deal with the Democrats and the Jews in New York.

In my view, the Feds have no business throwing around taxpayer money to salvage an insurance company. That’s state business. Maybe we would end up there, but where’s the good-sense protocol? If you’re Bernanke you naturally would have had lunch with New York Governor David Paterson and NY insurance commissioner Eric A. Dinallo and ironed out an agreement beforehand. And maybe they did. Everyone should have been placed on the same page here, especially the financeers of this grandiose deal, the American taxpayer. We know it’s our money, but we weren’t even consulted.

There will be a lot of political backlash on this Fed move. John McCain was right–we should let AIG fail, and that’s pretty much what the Bush Administration decided to do rather than expose our national assets on a private enterprise like this. Of course, Obama was silent. He doesn’t even know to this day and hour what he would have done because he’s an “empty suit”–a deadhead.

A lot of national leaders must have quizzical looks on their faces this morning. Commerce Committee Chairman Daniel K. Inouye (D-Hawaii) should call for hearings and start questioning the likes of Greenspan and Bernanke. Ask them how they feel this is all going to fall out? At the least, Bernanke has overstepped the bounds of his authority.

And at most, he has done something that should have called for pre-counseling from others, including the Treasury and the President. How does Bernanke even know the U.S. Treasury has enough money in the bank to pay for this kind of socialistic maneuvering? If we’re halfway broke, who delegated him to completely break the bank?

When we look into what has turned out to become–The grand AIG fiasco–we’ll find the U.S. is on the ropes with money. In fact the U.S. is broke and our elected officials haven’t yet awakened to that fact.

It is quite disheartening to see the Fed use taxpayer money this massively when they have no accountability. Blog onto this story. Do you believe the Fed should be so powerful, first off; second, doesn’t it seem weird and wrong for a private group like the Fed to be able to tap into your pocketbook and mine whenever they please?

My position is that this is very wrong. In this case, the Fed has stepped way beyond their previously-given mandate. Maybe Congress should look into what the Fed can or cannot do and change something here. Next, they’ll be selling the Capital buildings and the White House.

Or maybe not. Can you imagine how badly the Fed would perform–not to say that Alan Greenspan and Ben Bernanke have been angels and highly competent--if we had a political hack making these decisions? Who is to say Bernanke is not beholden to somebody–perhaps many of AIG’s biggest stockholders? If anyone has information on that, sound off, please.

The following fits in nicely with this from Slate:
In for a Pound

By Daniel Politi
Posted Wednesday, Sept. 17, 2008, at 6:42 AM ET

News keeps pouring out of Wall Street and all the papers lead with the Federal Reserve‘s startling decision to lend insurance giant American International Group up to $85 billion in a bailout deal that would give the government control over the company.

The New York Times calls it “the most radical intervention in private business in the central bank’s history.” In exchange for its cash, the government would get a 79.9 percent equity stake in the company. The Washington Post notes that the rescue package “effectively nationalizes one of the central institutions in the crisis that has swept through markets this month.” The Wall Street Journal points out that this is “a historic development, particularly considering that AIG isn’t directly regulated by the federal government.”

The move marked an astounding about-face for the government that had been resisting AIG’s pleas for help over the last few days and earlier chose to let Lehman Bros. fail rather than put forward more taxpayer money. “The main difference between the two situations: AIG is so huge and its operations so intertwined in the financial system that the Fed feared an AIG failure could harm the broader economy,” USA Today summarizes. Or as the WSJ puts it: “This time, the government decided AIG truly was too big to fail.” The Los Angeles Times notes that while Fed officials said the action was due to the fact that AIG insures the assets of millions of Americans, it seems the main reason “was fear that the company’s failure could weaken or destroy nearly a half-trillion dollars’ worth of financial protection that AIG provides Wall Street firms and the biggest companies of Europe and Asia.”

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Daniel Politi writes “Today’s Papers” for Slate. He can be reached at