http://www.lewrockwell.com/…

Writes Bob Higgs:

My source is Bloomberg.Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

I believe he said “the banking system is bankrupt.” That seems like an honest statement. And then he said “you try to keep it going.” Pretty cool, eh. Zombie banking system. Keep it going.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

Note: the Treasury changed the law. The pretense that Congress makes the laws, with the president’s assent, has apparently been abandoned as unnecessary in a crisis. Besides, under the present emergency regime, the Treasury is the government, with assistance from the Fed and the FDIC. All the rest is mere window dressing.

Reid may not know what to do… but Paul does. Too bad no one listens.

http://www.bloomberg.com/…

AIG dropped 34 percent to $2.54 by 1:26 p.m. in Germany, after falling 80 percent in the past week in New York on concern the company would go bankrupt. The seizure in credit markets and more than $500 billion of losses related to subprime mortgages forced the government to take over Fannie Mae and Freddie Mac, which control about half of America’s $12 trillion in home loans, and drove Lehman Brothers Holdings Inc. out of business.

“I am floored,” said former Treasury counsel Peter Wallison in an interview. “No one could have possibly imagined this a few months ago. I can’t imagine why the Fed would do this unless they were sure AIG’s failure posed systemic risk.”

No one? Not a single person? Really, Mr. Wallison? I’m pretty sure the Austrians were. I’m pretty sure I recall Ron Paul talking about the bad things coming at presidential debates, TV interviews and written works.

UPDATE:

Here is one on Fannie and Freddie from 2003:

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

Within minutes of the FED announcing the rescue of the crumbling insurer, I had the luck of being able to chat with an AIG employee about the Government’s repsonse and AIG’s current financial situation:

AIG employee looks like the Fed will be bailing us out. take THAT, taxpayers!

xyz ugh. this is really sickening.

AIG employee bwahahahaha!!

xyz you do realize that youre part of that “tax payer” category, right?

AIG employee yeah but the money this will bring me personally is probably more than Ipaid in taxes in the past year or so. finally the government does something right for a change. yay Fed!

xyz i disagree

AIG employee No, if AIG bit the dust then I just would’ve been canned with everyone else. Now we’ll be offered buyouts. That’s a lot of money for me.

xyz you should have been canned, just like lehman brothers. AIG was bankrupt and deserved to fail

AIG employee No, AIG is solvent and I did not deserve to be canned. There is a liquidity due to the Financial Services arm of the company. liquidity *issue*. Anyway, the insurance part of the company (where I work) is healthy and we have $1 trn in assets worldwide.

xyz an $85 billion rescue plan is solvent?

AIG employee You’re talking about something you don’t know anything about. it’s a bridge loan. AIG has more than enough assets to cover its credit default swaps, but not enough to to capitalize them. enough *time* to capitalize them


Read More…

http://www.reuters.com/…

An $85 billion government rescue of insurer American International Group Inc looked increasingly likely on Tuesday to stave off a bankruptcy that would have thrown world markets back into turmoil.

The Federal Reserve will extend AIG $85 billion in exchange for a nearly 80 percent stake to bail out the troubled insurance giant, a person briefed on the matter said.

The deal would avoid the biggest corporate bankruptcy ever and follows a government bailout of mortgage lenders Freddie Mac and Fannie Mae just over a week ago.

Then AIG shares, which had sunk 21 percent in regular trading, fell as much as 48 percent in after-hours dealings after reports of a rescue that could wipe out shareholders.

The New York Times, which had reported that AIG could file as soon as Wednesday for bankruptcy protection, later reported the deal with the Fed.

“This would mean another shareholder wipeout,” said David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut.

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were briefing members of Congress on the deal on Tuesday evening, a Treasury official told Reuters.

“They’re too big to fail. AIG touches too many people and too many companies globally, and it would be much more of a disorderly event if it went bankrupt than it was with Lehman,” said Anton Schutz, president of Mendon Capital in Rochester, New York.

Of course they did. The government goes back on it’s claim, tax payers get it in the ass and the economic problems will continue that much longer.

I bet Lehman Bros. is a bit pissed.

UPDATE:

A bit more info over at CNN:

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today’s rates. AIG will sell certain of its businesses with “the least possible disruption to the overall economy.”

AIG will sell certain of its businesses with “the least possible disruption to the overall economy.” The government will have veto power over the asset sales and the payment of dividends to shareholders.

The company’s management will be replaced, though Fed staffers did not name the new executives. The board will remain. For customers, it will be business as usual, officials said.

Two years ain’t no bridge loan.