Power And Dollar

Why AIG? Why Not Lehman?

Bush administration has been acting already.  We just don’t know if the actions are effective.  Why did the government bail out AIG (NYSE: AIG) and not Lehman (NYSE: LEH)?  And now with US$180B from central banks all over the place, would that not be enough for Lehman?  Why did the market react so well to the AIG bail out news initially and fell flat the following day (449 points)?

 

Lehman’s failure is expected to be well contained within the market.  Federal Reserve considered AIG’s failure to be contagious.  Since asset seller always knows more about the sale than the buyer, Federal Reservemay have advanced knowledge (they must have studied the books and saw it coming.  Else Federal Reserve cannot come up with a number, any number, just enough to be a lifeline.) about AIG’s books and prompted the bail out.  Furthermore, Lehman, Merrill (NYSE:MER) (sold, not bail out), and AIG may give a strong appearance of cascade effect.  Therefore, propping up someone may be necessary to give the signal that Treasury continues to back up the market and will not let a free fall. 

 

Bailing out AIG gave confidence on the day of bail out news release because the market thought “Thank God they bailed out AIG”.  However, the fall on 2008.09.17 is the result of an after thought: “Since AIG is not a primary dealer to the Federal Reserve, its exposure should not be the greatest.  Therefore, if AIG can go down, ….”

 

The not bail out of Lehman is giving some other information. 

 

Is Federal Reservebeing selective about the bail out based on the quality of portfolio rather than the dollar amount required?  After all, Federal Reservebailed AIG, Freddie, Fannie and Bear Stearns and not Lehman.  On top of that, Federal Reserveengineered Countrywide and Merrill sales.  Bear Stearns was just the first time.  By the time Freddie and Fannie got their bailouts, Treasury should have a good experience by then (sadly).  

 

Is Federal Reservebeing selective about the bail out based on the exposure of counter party risks (I doubt this part of AIG’s books is public information.  I can only suspect that LA Times is making a speculation.)?  Is that why Lehman is not saved?  Therefore, “Too Big To Fail” is based not on dollars but counter parties.  Will that encourage other firms to increase its counter party risks in order to secure itself to be bail-able?

 

Federal Reservehas been trying to implement other controls to fix the market.  Is Federal Reservestudying the second wave of controls based on Lehman’s failure?  In this case, it would be very clear that we can expect more failures since the previously implemented controls failed to prevent more meltdowns.

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September 18, 2008 - Posted by | banking, Barack Obama, business, Current Events, Democrats, economics, election, Investment, John McCain, mccain, obama, Palin, politics, Republican, Sarah Palin, wordpress-political-blogs

3 Comments »

  1. isn’t another aspect of an AIG failure that “regular” people would loose insurance and pensions ?

    Comment by Alfie | September 18, 2008 | Reply

  2. yes. too many people spoke about that already. i do not want to be talking about the same thing.
    you see, you already know it without me saying a word about. what am i here for if i tell you the things u already know?

    something true is important. true and new is even better.

    Comment by royho | September 18, 2008 | Reply

  3. it’s hard to object to the government’s mass bailouts from a historical standpoint since similar debt-producing methods were put into action to save the U.S. from the Depression; it’s like we’ve been heading for socialism this whole time…

    Comment by kingdom media | September 19, 2008 | Reply


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