I discussed how the government wanted to switch roles from being the lender of last resort to that of lender of first resort, a placement that was never supposed to happen. After the FHA program was only able to muster about 30% market share, though it was still climbing, they just had to takeover Fannie Mae and Freddie Mac, solidifying their position as lender of first resort by controlling 80% of the market.
Now, it appears they wanted to be the insurer of first resort also. Yesterday, they announced their bailout plans for AIG, and though it is supposedly just a loan, it requires the Federal Reserve to take a 79.9% equity stake, giving them full control over AIG’s actions, including dividend payouts for preferred shareholders. That move virtually guarantees the stock has no value anymore.
And what about the loan? The $85 billion puts every American on the hook for $283, and we weren’t even asked for the money. Sure it is a loan that is supposed to be repaid, but only from the sale of assets which will take a while and likely yield only pennies on the dollar. With the Federal Reserve charging the 3-month LIBOR plus 850 basis points (currently 11.38%) interest on the loan, you know even they feel the loan is a high risk.
The Federal Reserve mentions taxpayers are protected since the loan is secured by AIG’s assets and its primary non-regulated subsidiaries, but a loan secured by crap can only be described as a crappy loan. Again, the interest rate is a give away as to the chances of repayment.
So, let’s see, the government bailout programs add up to over $300 billion dollars with all of it likely to be non-refundable contributions by taxpayers. It is hard to say where all this will go or exactly how much it will cost us. The one thing that is certain is that whenever the government intervenes, it is not a good thing overall.
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from a historical standpoint it’s hard to object to the government’s mass bailouts since similar debt-producing methods were put into action to save the U.S. from the Depression; maybe we’ve been headed for socialism this entire time…
I disagree. History shows government intervention prolonging the problem more so than helping. The New Deals after the Great Depression actually prevented a speedier recovery. Check out this post for a more thorough review of government intervention and history…
Should the Government Clean Up the Mortgage Mess?