Sunday, September 21, 2008

Creeping Socialism

It would appear that the Bush administration is moving the country closer to socialism. One of the nations largest insurance companies has now been eighty percent nationalized. Since one of the insurance products of AIG is health insurance, it would appear that the Bush Administration is preparing us for socialized medical insurance.

15 comments:

Chris McClure aka Panhandle Poet said...

One thing interesting here is that due to market moves since the "bailout" the Fed has made about $19B on their stock options as of about 9:00 a.m. Central today.

Sue said...

Which of course they can only realize if they sell them, and they can't sell them because other wise the stock (and company) would tank.

Chris McClure aka Panhandle Poet said...

Sue: That's not necessarily true. The stock is pledged against a loan. The goal was to provide security to policy holders that their policies were good. The loan, a substantial capital injection, did just that. That is the reason the market has responded favorably. In fact, the market might respond even more favorably to the government liquidating its stock position. The effect in doing so would be to convert the Fed's "bailout" into market capitalization of the cash injection. It would also signal the success of the bailout. That would put AIG on more solid financial footing than they are currently. I suspect that medium-term (or maybe reasonably short-term) the Fed will be out of this one and the Treasury will probably make money in the process.

Keep in mind, the government made a $313 million profit on its stock options in the $1.5B bailout of Chrysler in 1980.

AIG is the single largest insurer in the U.S. If allowed to fail in a "crash" the insurance industry would likely collapse. The Fed bridge loan is designed to allow an orderly liquidation of AIG assets until the company can be restructured into a profitable entity. Although the government has 80% control of the company, I find it positive that they hired capable management from private industry to supervise the company. This is not socialism. It is protection of the American public -- and not necessarily the investors in AIG. That will depend upon the orderly restructure.

The bailout for Fannie Mae and Freddie Mac is a different situation altogether.

Sue said...

Chris, perhaps I'm just ignorant of the way corporate ownership works or perhaps it is just a difference in terminology, but my understanding was that the Fed actually took full possession and voting control of 80 percent of AIG stock, not simply "stock options." Here's a quote from Newsday.com:
"For AIG, meanwhile, the deal is a start - but not really a full bailout, experts said. First, management had to give up control of the company, handing over a large ownership stake over to the U.S. government. Second, the loan is at a "penalizing" interest rate, experts said. And most significantly, the insurance company will probably look very different at the end of its two-year loan term, because it will have to sell enough business units to be able to pay back the loan. It's possible, experts said, that, in the end, no independent entity of the current AIG will be left."

Sue said...

And Chris, since when are conservatives in favor of the federal government nationalizing private corporations?

Chris McClure aka Panhandle Poet said...

Sue: I'm not in favor of a "bailout" however, that being said, the government to a large extent created the conditions which allowed AIG to come apart. Due to the potentially devastating impact on the U.S. economy, there was little choice but to bail them out.

The following articles might be of interest:

http://www.thestreet.com/story/10437414/1/the-fed-bails-out-aig.html

http://federalreserve.gov/newsevents/press/other/20080916a.htm

Note: 3-month LIBOR +850 basis points = 11.38% [2.88 + 8.50] Yep, that's an exorbitant rate. The problem was that on Tuesday, when AIG reached a crisis in its inability to meet regulatory liquidity requirements, the Fed was the only source of that large amount of funds that was able to do so on short notice (because of the meltdown of the financial market around Merrell Lynch, et al). Since that time, a private equity group has organized and is likely to pay off the AIG debt to the Fed.

The alternative was bankruptcy in which everyone loses.

Sue said...

Yes, Chris the government DID create the conditions by practicing laissez faire, just the way Republicans wanted it too -- the government didn't regulate the financial markets like they should have.

Great tongue-in-cheek (or is it) article in Time:
http://www.time.com/time/nation/article/0,8599,1843168,00.html?imw=Y&loomia_si=t0:a3:g4:r2:c0

Chris McClure aka Panhandle Poet said...

Sue: "Yes, Chris the government DID create the conditions by practicing laissez faire, just the way Republicans wanted it too -- the government didn't regulate the financial markets like they should have."

Methinks you are confused. Have you looked at the Federal statutes regulating financial and insurance markets lately? There aren't enough years in a month to read it all let alone understand it.

I don't know which party is to blame -- probably both -- but the problem started when they let insurance companies act like banks and banks act like stock brokerages and insurance companies and on and on. You would think we would learn our lessons with the S&L debacle of the 80's and 90's. But, I forget, we have a short memory.

I'm certain Socialism is the answer. Just look what it did for the USSR (I couldn't resist).

By the way -- side note -- did you see the list of wealthiest U.S. Congressmen that came out today? There were more Democrats than Republicans on the list....mostly trial lawyers.

Sue said...

Chris you said: "the problem started when they let insurance companies act like banks and banks act like stock brokerages and insurance companies and on and on."
The process of not "letting" companies do things IS regulation. If the financial industry was properly regulated (not just bogged down in paper work -- proper regulation requires actual investigation and penalties and people watching over things) then they would not be "let" to do exactly the things you say (and I agree with you) are the problem. How can you not see that the issue of not letting "insurance companies act like banks and banks act like stock brokerages and insurance companies" is in fact regulation.

Chris McClure aka Panhandle Poet said...

Sue: It IS regulation. I was in the lending business for 7 years -- 80's and 90's. I watched the amount of paperwork required to complete a simple mortgage loan go from 5 or 6 documents to a stack over an inch high. It was all done to be regulatory compliant. During that same period, banks were newly allowed to sell certain securities which placed them under additional regulations. S&L's and Credit Unions were newly allowed to have checking accounts -- more regulations. The lines between different types of financial institutions blurred (supposedly in the name of DEregulation).

Proper regulation IS the problem. It is non-existent -- never has been, never will be. It doesn't matter what kind of government there is or which political party is in control, regulations will never be "properly" enforced.

What does happen is that government grows, regulatory burdens increase, companies are mis-managed (either through illegal or inept means), taxpayers pay more taxes, consumers pay more for products (because of the regulatory burden), politicians call each other names and promise they will fix the problem -- and nothing happens except the government grows at the expense of the taxpayer -- or citizen -- or comrade -- or whatever you want to call him. The more it grows, the greater the opportunity for crooks to take advantage of the citizens of the country who believe (purely a pipe dream) that the government is here to protect them from the "big bad" corporations and crooks.

The best government is the least government. We need to quit molly-coddling criminals and start punishing them. Hanging horse thieves was fairly effective in minimizing the number of horses stolen. It also made governing the people much simpler.

Chris McClure aka Panhandle Poet said...

Sue: I've posted some additional thoughts on the bailout here.

Pat Jenkins said...

what ever the solution, it should include the reasons for this happening in the first place, i.e. congressman making themselves rich through government, as being terminatied. good discussion by the way guys, i learned quite a bit...

E. R. Dunhill said...

Sue,
Unrelated: Given your past writings about trams and their ilk, I thought you might be interested in this article.

Sue said...

ERD -- thanks for the link, that was really interesting.

Chris -- what are your thoughts about the Republican Congressional delegation voting overwhelmingly against the Bailout bill?

Chris McClure aka Panhandle Poet said...

Sue: I think it was a knee-jerk reaction to Pelosi's speech. Right move -- wrong reason.