Results for “age of em”

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There is some.  First, it seems (knock on wood) the Fed and Treasury may make money off the AIG deal, at least over a time horizon of one to two years.  Felix Salmon explains some detail.  The company has assets and if it needs to borrow money it is paying the Fed at Libor plus 850 (!). 

Second, the size of a guarantee does not represent the cost of the bailout.  I have been getting many emails about "the cost of the bailouts" and in truth we still don’t know what those costs will be.  But think in terms of balance sheets to start on the problem, not numbers in headlines. 

Third, if the Fed needs to "print money" to make good on various guarantees (NB: this has not been the case), this need not be as disastrous or as inflationary as it sounds.  If it came to this, the Fed is creating money to protect against potentially deflationary events so the inflationary impact of that money creation is blunted.  (That said, you don’t usually want to trade in bank-created higher monetary aggregates for an increase in borrowed reserves.)

You might wonder if AIG is (possibly) a money-making deal, why no one else wanted in on the action.  Think of it as a prisoner’s dilemma among the lenders.  No one of them wants to put up money at non-exorbitant rates and so the company — which has partially illiquid assets and profit-maximizing, weakly capitalized shareholders determined to take advantage of lenders — fails.  But with the guarantee the company can borrow cheaply and the lending continues.  The company can continue and oversee an orderly liquidation.  That’s not a pretty picture and it does mean that, in the bad world-states, losses continue to stack up precisely because the guarantee was extended.  But the good world-states are there too and the expected value of the guarantee and purchase may well be positive.  To give an example, Argentina in its crisis days had net positive value but no one wanted to lend to them either.

Recent events remind me of the arguments against free capital movements for developing countries and whether those capital movements boost economic stability and growth.  Well, we have free capital movements for investment banks and insurance companies and of course the losers get hit by whipsaw effects.

Did you notice that short-term Treasuries have been trading at rates close to zero?  That’s not good news. 

In presenting all this "good news," I don’t mean to communicate a pollyannish attitude.  The bad news is indeed very bad but let’s understand it in its proper context.

I’d like to stress again that I remain worried about the rule of law in all these events.  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.  (Does that sound familiar?  Would this administration do that?)  That’s why it is all being done through the Fed.  Fortunately the Fed is also a competent technocracy (as is the current Treasury) but 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.

The National Bank of Ethiopia (NBE) has sacked Almaz Moges from her post as General Manager of the turbulent Nile Insurance.

Getahun
Nana, Banking and Insurance Supervision Department head, wrote a letter
to Nile on June 19, 2008, informing them that her deputy, Dawit G.
Amanuel, would take over the post. It is alleged, however, that she
refused to hand over the office to her successor. The central bank
subsequently shut down the office on Thursday, June 26, 2008.

The letter came a week after the central bank
declined to approve two of the seven newly elected members of the Board
of Directors. Almaz had been advised by officials at the NBE that the
insurance company needed better management. Currently, the company is
in debt for more than 50 million Br following various business deals.

Yes the company had excess debt.  Here is the story.  Here is a picture of Almaz Moges.  Here, in black and white, is the authorized role of the bank in regulating insurance companies.  Here is Megan McArdle and here.  Read Felix Salmon.  Here are some cautionary words about strangers.  So can New York State now regulate the Fed?

As it turn out, the really risks in the system were being created not
by hedge funds but by boring old investment banks and insurance
companies. Sure there have been hedge fund failures but none on the
scale and with the repercussions of the recent failures of Bear
Stearns, Lehman Brothers, and the government sponsored mortgage
companies. Hedge funds might not have had all that many rules governing
their behavior but their incentive pay structure seems to have
regulated their risk far better.

Here is more.  On the other side of the governance fence:

The Wall Street Journal is reporting that the Federal Reserve has asked
Goldman Sachs and J.P. Morgan Chase to help make $70-$75 billion in
loans available to the AIG.

That’s a lot of money to "ask" for.

It’s hard not to report this:

$$$ On CNBC they are saying that AIG has asked the
Federal Reserve for some kind of emergency bridge loans. Can the Fed
lend to an insurance company?

$$$ Federal Reserve is dramatically expanding its emergency lending program. It’s now going to take all sorts of collateral, including equity.

$$$ "Take a very deep breath. It looks almost certain
that this week will be the one where we see the financial implosion in
U.S. banking and brokerage that many have been expecting for some
time," Paul Kedrosky says.

$$$ With Merrill Lynch, Lehman Brothers and Bear
Stearns gone, everyone is asking whether Morgan Stanley and Goldman
Sachs will survive as independent investment banks.

Addendum: Here are Dow futures, at 10:21 p.m. down about 300 points.  All things considered that counts as good news.