hear that sound?
Quote:
US Treasury recapitalises Fed
By Francesco Guerrera in London, Aline van Duyn in New York and Krishna Guha in Washington
Published: September 16 2008 14:47 | Last updated: September 17 2008 15:36
The US Treasury on Wednesday announced that it was creating a supplemental funding programme to ensure that the Federal Reserve has the cash it needs and its ability to provide emergency liquidity support for the markets is not constrained by the size of its own balance sheet.
The move was intended to deal with fears that the US central bank’s balance sheet was overstretched following the AIG loan announced on Tuesday.
The Fed said on Tuesday it would lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company – an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.
Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the existing management of the company will be replaced and new executives - as yet unnamed - will be appointed. Reports on Wednesday suggested Edward Liddy, the former Allstate chief executive, will replace Robert Willumstad, the chairman bought in to replace ousted chief executive Martin Sullivan last year.
Eric Dinallo, New York Insurance Superintendent, told CNBC on Wednesday morning that AIG’s assets had already attracted strong interest but that the company might need more capital. AIG shares fell heavily in pre-market trade and were trading down 43 per cent at $2.13 shortly after the markets open.
The authorities, which will retain veto power over major decisions at the company, will receive equity giving them a 79.9 per cent stake in AIG. In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
The Fed said in a statement it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.
The issuance of the equity participation note to the government is designed to prevent existing shareholders from profiting from a rescue of the company, which has been hobbled by the losses on complex securities backed by mortgages and other assets.
President George W. Bush said the rescue was “to promote stability in the financial markets”.
The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG’s shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).
The AIG crisis fuelled another day of turmoil on global markets on Tuesday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America. Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent on Tuesday night.
“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimise the disruption to our economy,” said Hank Paulson, Treasury secretary. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”
But even as the plan was being being mapped out, there were already signs of political opposition. “I hope they don’t go down the road of a bailout, because where do you stop?’’ Richard Shelby, top Republican on the Senate Banking Committee, told Bloomberg Television.
Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee, said: “The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times.
”You have to stop to catch your breath. But upon reflection, the alternatives are much worse.’’
During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution.
In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29bn credit line. Earlier This month, the Treasury seized control of troubled US mortgage giants Fannie Mae and Freddie Mac.
But at the weekend the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy early Monday morning, rocking the financial system, while Merrill announced a $50bn takeover by Bank of America the same day.
AIG’s plans for a private sector capital infusion were dashed by a further slump in its shares on Tuesday after sharp cuts in the insurer’s credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.
Tim Geithner, president of the New York Fed, skipped the Fed’s interest-setting meeting to focus on AIG – a sign of the regulators’ heightened state of alert over the insurer’s plight.
Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.
AIG’s fight for survival came as Hank Greenberg, AIG’s former chief executive and the company’s biggest shareholder, announced he was considering a bid to take over all or part of the company.
Mr Greenberg has sent a letter to AIG’s board and its chief executive, Robert Willumstad, complaining about its refusal to take up his repeated offers to help the company group he ran for decades.
In a letter published in Wednesday’s Financial Times, Mr Greenberg urged the US government to step in to provide a loan if private lenders could not be found. He said AIG needed a temporary bridge loan in order to prevent further ratings cuts “which would likely prove fatal” and “pose systemic risk to the US and international financial systems”.
Copyright The Financial Times Limited 2008
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FT.com / In depth - US Treasury recapitalises Fed
that's the sound of this form of capitalism cracking at it's seams.
here's a .pdf which shows something of a.i.g.'s structure, which helps explain why it was too big to allow to fail:
http://media.ft.com/cms/425ac584-841...0077b07658.pdf
(you may need to subscribe to ft.com to see it)
so what this means, i think, is that the nation-state based mechanisms available to stabilize major perturbations in the trans-national capital-flow stratum of social being (neat-o terminology, yes?) has reached it's limit.
there's been something on the order of 3 TRILLION dollars pumped into the banking system over the past 72 hours. this capital has come from most of the central banks in the metropole.
it was not enough.
the particular ineptness of the bush administration--acting in strict accord with the premises of the neo-liberal ideological substitute for the world---has resulted in a.i.g. costing so much to bail out that the fed is stretched to its absolute limit--and that, folks, means that we were on the brink of the collapse of the state itself as a regulatory mechanism *capable* in principle of managing dysfunctions at the level of these capital flows.
this is still unfolding---what do you make of this new creak in the system soundtrack?
why do you think this is still not THE story in the american media?
i think it is because, in part, the press has adopted neoliberal premises as its collective lingua franca, and that as the world commensurate with this ideology hits a wall of it's own making, description requires that one step outside the discursive frame of neoliberalism itself--you cannot deal with questions about axioms from within a proof that presupposes them--so it follows that you cannot deal with ideological crisis if your own framework presupposes the ideology that;s in crisis.
hear that sound?