Miscellaneous AIG Stuff

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MISCELLANEOUS AIG STUFF….Here are some random links related to the AIG bailout. When it’s all said and done, by the way, I suspect that the Fed is going to end up making a tidy profit on the deal. But that’s a few years down the road. In the meantime, here are some worries, offered without comment because they’re above my pay grade:

  • Stephen Bainbridge has some very specific questions about the legality of the Fed’s takeover of AIG. For example: “How can the federal government take a security interest in AIG’s assets? Presumably AIG had debt securities outstanding that include negative pledge covenants. If so, why doesn’t this deal violate the trust indentures? This one really bugs me.”

  • Tyler Cowen has some more general concerns about the legality of what happened: “First, the referee is on the playing field. Second, while Dodd and others are on board, basically we have the executive branch of our government — the Treasury — operating without formal checks and balances….The broader implications here are very worrying, both for governance and for the future of the Fed itself. Maybe there is no better alternative, but these developments are a sign of just how dysfunctional American government has become.”

  • Jim Manzi notes that the Fed has been forced to ask the Treasury for additional funds to backstop its AIG bailout: “The reason this is so important is that, in effect, it materially undermines the independence of the US central bank, while central bank independence is a widely-accepted predicate for anti-inflationary policies over time in a modern democracy. If the Fed becomes just a part of the Treasury Department (though this announcement is only a move in that direction), we could have real problems.”

  • Reuters reports that the federal government’s AAA credit rating is under pressure. Also this: “The cost of insuring 10-year U.S. Treasury debt against default rose Wednesday to a record high, a day after the government rescued insurer AIG with an $85-million loan….Ten-year credit default swaps, or CDS, on Treasury debt widened three basis points to 26 basis points, according to data from CMA DataVision. This means it costs $26,000 per year to insure $10-million of U.S. Treasury debt against default.”

You know, I never even realized there was a market for insurance against U.S. Treasury default (let alone that the cost of a CDS on American debt is now twice as high as that on German debt). I mean, think about it: what would have to happen for the U.S. government to start defaulting on its bonds? The only scenarios I can think of are so cataclysmic that (a) you’d have way bigger things on your mind than whether your T-bills are going to get paid off, and (b) the odds that the insurer would still be solvent while the U.S. government collapsed around it are about nil. So what’s the point of buying it?

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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