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The Federal Reserve tonight (Sept. 16) agreed to a bailout of $85 billion to rescue American International Group (AIG), the big insurance company. It comes two weeks after the government buyout of Fannie Mae and Freddie Mac. In both cases, policy makers feared that derivatives would unravel, causing a chain reaction that would send many financial institutions under. Once again, the main villain appears to be credit default swaps, or highly-complex debt guarantees, a form of derivatives. Under the rescue plan, the Federal Reserve could own almost 80 percent of AIG. The company had ousted its top dog, Maurice R. Greenberg, after an accounting scandal in 2005. AIG then readjusted its books and supposedly instituted conservative accounting polices. Stocks rose today in anticipation of the bailout. U.S. futures are up this evening and Asian stocks, on balance, are up. There might be an extended rally, as there was after the Bear Stearns bailout of Wall Street in March, but eventually investors will have to face economic reality: the financial system is broken. The AIG and Fannie/Freddie moves could be such drags on taxpayers that there might finally be discussion of the key questions: why do all these officials who claim to believe in free markets continue to keep a free market from operating? Is this election year politics? When do these bailouts end? The day after the election?
The Federal Reserve tonight (Sept. 16) agreed to a bailout of $85 billion to rescue American International Group (AIG), the big insurance company. It comes two weeks after the government buyout of Fannie Mae and Freddie Mac. In both cases, policy makers feared that derivatives would unravel, causing a chain reaction that would send many financial institutions under. Once again, the main villain appears to be credit default swaps, or highly-complex debt guarantees, a form of derivatives. Under the rescue plan, the Federal Reserve could own almost 80 percent of AIG. The company had ousted its top dog, Maurice R. Greenberg, after an accounting scandal in 2005. AIG then readjusted its books and supposedly instituted conservative accounting polices. Stocks rose today in anticipation of the bailout. U.S. futures are up this evening and Asian stocks, on balance, are up. There might be an extended rally, as there was after the Bear Stearns bailout of Wall Street in March, but eventually investors will have to face economic reality: the financial system is broken. The AIG and Fannie/Freddie moves could be such drags on taxpayers that there might finally be discussion of the key questions: why do all these officials who claim to believe in free markets continue to keep a free market from operating? Is this election year politics? When do these bailouts end? The day after the election?