Roubini thinks the Fed screwed up the AIG nationalization:

The reality is that it would have been more honest and clean and proper to take AIG to bankruptcy court and then provide the government support (the $85 billion loan) in the form of a formal debtor-in-possession (DIP) financing. Why was this solution not taken? It is not clear. Going to court may imply a credit event that triggers formal default and consequences for creditors and CDS holders and the guarantees made by AG on toxic fixed income securities. But what has happened is effectively a credit event and such triggers should be occurring regardless of whether AIG goes into formal bankruptcy court or not. The Fed and Treasury should immediately clarify on whether their intervention includes or not a formal stay on all the creditors of AIG including the holders of the short term claims against AIG.
Any fuzziness and lack of transparency on this matter would be severely destabilizing for markets and investors. To truly safeguard the government claims such a stay should be imposed; and [if] it is not imposed the government action will allow short term creditors of AIG to run scot free with two consequences: the government claims will be at risk putting taxpayers’ money at risk; and the claims of longer term creditors of AIG will be whacked more down the line as short term creditors were allowed to be bailed out.
…
And by nationalizing AIG the government that two days ago drew a line in the sand on no more bailout with its decision to let Lehman to go bust has now opened again the floodgates of moral hazard and of private firms’ demands to be bailed out. Already Ford and GM are requesting loans guarantees and Congress is considering them. Next will be airlines and lots of other non-financial corporate who expect now the government to bail them out. The argument of the supplicants will be: “If we are bailing out Wall Street firms such as Bear, Fannie and Freddie, AIG and soon enough banks why shouldn’t we bail out Main Street firm such as Ford and GM that are also systemic ally important? After all Bear was employing only 20 thousands or so folks while Ford and GM have hundreds of thousands of employees.”
So soon enough the transformation the USA into the USSRA (United Socialist State Republic of America) will be complete: we have defeated the USSRR to create a communist economy in the most advanced free market economy in the world. And calling it socialism (even socialism for the rich, the well connected and Wall Street) is giving a bad name even to a failed experiment like socialism; this is more akin to the creation of a corporatist state (like the Italian fascism or the Germany Third Reich) where private sector interest are protected (gains privatized and losses socialized) where the government is taken over by corrupt and reckless private interests.
The paradox is that this this whole mess was creaete by a bunch of zealot fanatics who believed in the laissez faire ideology of free markets unbound by propers rules, regulation and supervision.

Posted by: b | Sep 17 2008 17:01 utc | 3

tantalus
all the elements of salò – the defeat, the dumbness & the depravity

Posted by: remembereringgiap | Sep 17 2008 17:32 utc | 5

Many long-time government officials are just shaking their heads in disbelief this week at what Paulson and his crew are doing. It truly does seem unbelievable that this tiny band of people are making these decisions and commitments of our national treasure with virtually no oversight or accountability, no longer-term plan (apparently), no analysis or policy discussion of the options. I have worked in the public sector for a long time and can not recall decisions of this magnitude being made with so little high-level vetting, discussion, debate, argument.
The news about the special bond sale is scary. I wonder what rate they (we taxpayers, that is) will have to pay.

Posted by: Maxcrat | Sep 17 2008 18:11 utc | 7

maxcrat
it is so simlar to the end of apartheid where the greed of generations who had looted & barbarised the country did not care one ounce for the generations that followed . it is clear now, that the empire is finished – but the people left paying the bill will be the children & the children of those children
in watching this & all the mechanisms we see the elite’s hatred of the people unmasked. in katrina it was bloated black bodies that did not offend the american psyche – now literally generation after generation of americans will be floating on the filth that paulson & wall street are constructing
the ruling class defending itself so seamlessly is a revolting spectacle

Posted by: remembereringgiap | Sep 17 2008 18:24 utc | 9

Good stuff, b. Realitognostics is always more usefully informative than prognostics.
Government cannot in and of itself correct itself. For Government to claim Change You Can Believe In to the public mobbing out in the street, while behind the bank, the double doors are off the hinge so the vault can be spirited away en masse, is farce.
Oh, we’ll get “change”, alright. As in, buddy, can you spare a dime? Anyone? Anyone?
Ironically, having foreseen this for 8 years, all we’ve been able to do is “present posterior” as a perfect victim, with CD’s, money market and non-performing precious.
Reread your Keating 5 history on what happened with that private debt was socialized.

Posted by: Keith Five | Sep 17 2008 19:24 utc | 11

Already Ford and GM are requesting loans guarantees and Congress is considering them. Next will be airlines and lots of other non-financial corporate who expect now the government to bail them out. The argument of the supplicants will be: “If we are bailing out Wall Street firms such as Bear, Fannie and Freddie, AIG and soon enough banks why shouldn’t we bail out Main Street firm such as Ford and GM that are also systemic ally important? After all Bear was employing only 20 thousands or so folks while Ford and GM have hundreds of thousands of employees.”
indeed, the question is simply: when does the fed run out of money? that’s the point i want to know. it’s like an umbrella: right now, dozens of corporate “people” are trying get in from out of the rain. but only so many will fit under the one umbrella of “full faith and credit,” and be extended immediately applicable cash to creditors (and golden parachute clauses) in a way that can be significant to a market reality over the next 6-18mos. so…after the fed can’t sell anymore bonds (because does anyone really think that there are enough lenders/buyers to extent of having liquid capital for the full value of debt of every entity that is exposed by this crisis?) what happens then? the chinese, saudis, and other “institutional grade” currency giants don’t, in fact, have endlessly deep pockets. short version: currency “value” is an illusion, and when the panic’s on, that illusion demonstrates the full extent of its fungibility.

Posted by: chicago dyke | Sep 17 2008 19:51 utc | 13

The financial sector was the only one after housing in the Bush era that was providing the “vig” to the made men of the American economy. Now both have collapsed. The Federal government is broke. 900 billion dollars was just added to the federal debt. There is only two options an orderly bankruptcy or shock therapy. The zealot fanatics who brought us Iraq and Shock Therapy are still in charge and neck and neck in the presidential race. We all are Houstonians now; soon to be without basic services, water and electricity.

Posted by: VietnamVet | Sep 17 2008 20:34 utc | 15

…which brings to mind Lawrence Lindsey, summarily fired for saying that the adventure in Iraq might cost as much as $200 billion…
Maybe the ownership has learned that their property isn’t well managed by people named “Bush”.

Posted by: alabama | Sep 17 2008 21:39 utc | 17

my illnesses preoccupy my time but i cannot believe we are witnessing the colossal collapse of capitalism – as we are – there is no doubt in my mind on that – yes it might drag itself through the swamp but it is finished. what remains important for me – is that it has had been condemned to unmask itself & its interests
it has had to unmask itself enough for the hatred of the people to be quite visible. what is also revealed or unmasked is the fact that these control infected elites in fact control nothing
on every level – domestic with cities completely ravaged in the empire either by neglect, flight of capital or mismanagement. new orleans for example is not exceptional in the landscape – there are a number of cities within the belly of the beast that have been ripped apart by human disaster, the ‘economy’ is nothing but a collection of card tricks, & the foreign policy possesses nothing except force & that too is failing
i do not revel in it but if ever an empire has deserved a comeuppance the u s empire is singularly worthy

Posted by: remembereringgiap | Sep 17 2008 23:10 utc | 19

A few links from me:
Mish wonders what law grants The Fed the power to lend to insurance companies….

“It’s a good question given that the Fed is widely thought to be authorized to lend only to banks. It turns out the Fed can lend to pizza parlors if it wants to, with a questionable interpretation of the Federal Reserve Act.”

The Big Picture has a pretty picture of financial losses by various companies…
Blog Maverick catches a buyback pattern at Merrill, Lehman, and AIG….

“3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.”

Lastly, I believe it bears repeating that since April 2008, The Fed has had its own staff in the offices of the very companies now getting Fed support…..

“The US Federal Reserve has sent staff into some of Wall Street’s biggest firms and its New York branch is gathering evidence on key traders’ activities as America’s central bank raises its scrutiny of risk to an unprecedented level.
Fed staff have set up shop in Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns to monitor their financial condition just days after Henry Paulson, the US Treasury Secretary, proposed that the Fed become the financial industry’s “risk czar”. “

best,
j

Posted by: Jeremiah | Sep 17 2008 23:41 utc | 21

rememberinggiap–
I am sorry for your personal news. I hope things will get better for you.
I welcome always the fresh incisiveness of your posts.
The financial news we are commenting on has been a long time coming, and long foreseen. In one sense it will get more chaotic, but that was foreseen too. The end of an iniquitous order of the world is deeply welcome, even as we know that vampires never give up their way of destruction–so that the end will be at least as hard as the times before–and that they will try to find a new cloak for themselves in which to insinuate themselves into the time that comes after.
Let us celebrate: Let fear be matched by joy. Times will get worse, terrifyingly worse, but our spirits will be heartened by the wrong that passes away.
–Gaianne

Posted by: Gaianne | Sep 18 2008 0:38 utc | 23

The paradox is that this this whole mess was creaete by a bunch of zealot fanatics who believed in the laissez faire ideology of free markets unbound by propers rules, regulation and supervision.

Or we can say that they are simply crooks. It is actually simple as that. I do not think they “believe” in anything but money grub.

the ruling class defending itself so seamlessly is a revolting spectacle

Why there is no revolt of the people in USA? Are they so bemused?

Let us celebrate: Let fear be matched by joy. Times will get worse, terrifyingly worse, but our spirits will be heartened by the wrong that passes away.

I am sorry to break news to you but the wrong will not pass a way. It’s just restructuring…
I have seen it before…all though some players will suffer the top players are opening champagne as we stare glued to TV and computer monitors in awe…

Posted by: vbo | Sep 18 2008 1:57 utc | 25

Henry Paulson has lost Control
over US Finance, Economy

When Henry Paulson agreed to leave his job as chairman of the powerful Wall Street investment bank, Goldman Sachs to go to Washington as Treasury Secretary in 2006 he demanded extraordinary powers as de facto economic czar. He got it. Paulson is also head of the President’s Working Group on Financial Markets — the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group is the financial world’s equivalent of the Pentagon war room. Paulson, not Fed chairman Bernanke, is the person running the Administration’s crisis management. And his recent actions indicate he has lost control as the snowballing problems from the semi -government mortgage companies Freddie Mac and Fannie Mae to the collapse of the multi-trillion dollar market in Asset Backed Securities (ABS) to the real economy are compounding into the worst crisis since the 1930’s Great Depression.
…Note the scale of the following store closings across America in recent weeks:…
…The process has only begun and neither major party Presidential candidate has dared to mention this on the ground economic reality, because they evidently have no solutions to offer that would not jeopardize their campaign finances. Obama is tied to not only Pritzker but also to Omaha billionaire, Warren Buffett and George Soros. McCain depends on the traditional money contributions of the Republican Party which demand permanent tax reform for highest income earners and a pro-bank laissez faire treatment of millions of homeowners facing home foreclosure and asset seizure by banks.
…Hundreds of thousands of real estate brokers, small and large bankers, furniture workers and salespeople, and construction workers are unable to find work. Jobs are being cut wholesale and those working are often on reduced hours. Car sales in June plunged by 28% for Ford, 18% for General Motors and even 21% for Toyota which will mean more layoffs in coming weeks. This will be the next wave of unemployment.
…By Williams’ calculations the US economy first entered recession, defined as two consecutive quarters of negative GDP growth, at the end of 2006. Ever since, the recession has deepened, dramatically so in the past 12 months. Little known is the fact that the Labor Department also publishes six different unemployment statistics from U1, U2 through to U6 being the most comprehensive. The reported “official unemployment” is the very narrowly defined U3 which stands at 5.5%. However, as Williams notes, U6 is the real measure and that officially shows 9.7% unemployed. His calculations put the figure at 13.7% actually unemployed and seeking work.
…The Arizona homebuilder continued, “Today nobody is building. Unsold home inventories are triple that of 2003. Banks no longer give easy credit for home buyers. Many realtors I know have gone two years without selling a home. Empty storefronts are becoming common. In many areas unemployment among construction trades people is 50% or more. Tens of thousands of illegal Mexicans who did most of the manual labor have returned to Mexico to find work. What now? Well, I do handyman projects of all sorts, big or small and make about 70-90% of what it takes to survive with a family of a wife and three young children. My savings make up the rest. That can’t go on for too much longer. We went from affluent and comfortable to nervous and broke with diminished opportunities in just three years. We used to be the middle class.”

Posted by: vbo | Sep 18 2008 3:14 utc | 27

vbo # 25,26 & 27–
Agree! Simply: crooks. “Free markets,” “trickle down,” yadayad–all just part of the scam. Jive, as that sort of talk is called.
Whole university Economic Departments and Business Schools bought, sold, paid for–totally corrupt. Not even high-class whores: They went cheap. Media pundits–ditto.
Why no revolt in the US? Sadly, most Americans are both well-propagandized and personally corrupt. As long as abuse happens to somebody else, not us, we don’t care. As long as we are making money, we don’t care. It never occurs to us that it will come home. It never occurs to us that all scams end. The builders and contractors quoted in the piece you cite–whether they acted knowingly or unknowingly they epitomize the corruption at the bottom layers. Whether they knew or did not know, they did not care that they were serving a scam. They don’t care now. They are just sorry that ended. This is moral corruption at the bottom.
At the top? That is what we are watching this week–out in the open with no covering at all! Simple, trillion-dollar theft committed in public!
I am not quite the optimist you think. I did not say ALL wrongs will pass away, for surely they will not. And you are right at least to the extent that the champagne corks are popping, and the Shock-Doctrine Capitalists are celebrating the coming restructurings.
But–though it took well over a decade–the Shock Doctrinists were finally thrown out of Argentina, so you know it is possible. Not likely, it seems, yet possible.
But the physical basis of capitalism really is gone, and won’t be coming back. This is a big change. And though it may take some years, and unfortunately a good deal of suffering for people to realize it, Capitalism really is over.
The real danger is that the vampires simply move on from Capitalism to some new scam, and yes, that is all too possible. America is about to have its head-in-the-toilet moment, which may lead to a desire to seek sanity, but–as anyone who studies addictions knows–equally may not.
In which case the vampires will still be with us.
But whether it goes well or badly–and both are possible–the collapse we are now entering is the window of opportunity.
–Gaianne

Posted by: Gaianne | Sep 18 2008 4:10 utc | 29

A New Role for the Fed: Investor of Last Resort

The Fed’s balance sheet, moreover, is being stretched in ways that seemed unimaginable one year ago. As recently as last summer, the central bank’s entire vault of reserves — about $800 billion at the time — was in Treasury securities.
By last week, the Fed’s holdings of unencumbered Treasuries had dwindled to just over $300 billion. Much of the rest of its assets were in the form of loans to banks and investment banks, which had pledged riskier securities as collateral.
In a sign of how short the Fed’s available reserves had become, the Treasury Department sold tens of billions of dollars of special “supplementary” Treasury bills on Wednesday to provide the Fed with extra cash. The Treasury sold $40 billion of the new securities on Wednesday morning and will sell $60 billion more on Thursday. More money-raising is sure to follow.
…
Unlike a company or a household, the Fed can raise as much cash as it wants by printing money and buying up Treasuries and other securities at will.
…
For months now, investment banks have shunned the Fed’s lending program because they feared being perceived as weak. But Mr. Crandall, of Wrightson ICAP, predicted that Lehman and other investment banks might have already tapped it for $50 billion since last weekend.
If they did, Fed officials will be holding collateral that is even riskier than what they already have,

Posted by: b | Sep 18 2008 5:45 utc | 31

There goes Morgan Stanley:
As Fears Grow, Wall St. Titans See Shares Fall

Seeking to avoid the kind of fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful effort on Tuesday evening to persuade Citigroup’s chief executive, Vikram S. Pandit, to enter into a combination, according to people briefed on the talks.
“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested. It is thinking of deals it can strike with consumer banks, like buying the struggling Washington Mutual out of bankruptcy if its reported efforts to auction itself should fail, that would provide it with cheaper deposit funding. A Citigroup spokeswoman declined to comment.

Posted by: b | Sep 18 2008 7:01 utc | 33

Yet, one of famous USA economist said here on TV something like this:
“Americans are clueless of what is happening, they will only start to understand when they receive their superannuation statements…
In near future if we see bank closed around our cities we’ll know we are doomed”

Posted by: vbo | Sep 18 2008 7:49 utc | 35

Econ Prof and former IMF head Kenneth Rogoff in the FT: America will need a $1,000bn bail-out

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.
…
A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.
The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.
It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.
Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

Posted by: b | Sep 18 2008 9:15 utc | 37

Recommended, though longish
CJR: Boiler Room –
The business press is missing the crooked heart of the credit crisis

It seems to me that well into Year II of the Panic, the business press is in the process of making the same mistake it made in the run-up to the debacle: focusing on esoteric Wall Street concerns and ignoring the simplest, most basic, but most important one—the breathtaking corruption that overran the U.S. lending industry, including and especially the brand names, and the extent to which Wall Street drove that corruption. Let’s just call it a case of over-sophistication. Its persistence, however, will only impede journalists’ ability to cover this thing going forward.
…
So, that’s what we know: the lending industry used marketing deception—including boiler-room tactics—on a mass scale against a class of financially vulnerable borrowers (which subprime borrowers are, by definition) and other middle-class financial amateurs already laboring with stagnating incomes and rising costs for health care, education, and, of course, housing.
Yet to be explored fully is the extent of Wall Street’s role, the size of the transfer of wealth between classes—from millions of civilians to thousands of professionals—that resulted, and the social and economic consequences of it all.
After that, we can we figure out what we do about it.

Posted by: b | Sep 18 2008 9:34 utc | 39

CluelessJoe,
None of that will happen until people turn off their television sets, mobile phones and ipods, until people collectively eschew their predilection for professional sports and radio talking heads. Until people remove these onerous distractions, they can not, and will not see, or do, a damn thing, and even if all of that was removed, there’s no guarantee they would take proper action. I truly believe most people lack the ability to think critically. There are numerous reasons for that, not the least of which is our educational system. The majority of Americans are not like the majority of folks who frequent MOA. They simply can’t think, just like a cow, sheep or pig can’t think.

Posted by: Non-Hodgkins | Sep 18 2008 12:00 utc | 41

Brad Sester’s Follow the Money blog has some worthwhile observations (among a good deal of chaff). I liked this comment aimed at “Helicopter Ben”:

gillies says:
for a picture to illustrate this post – imagine a helicopter dropping confetti into a bonfire.

Posted by: Hannah K. O’Luthon | Sep 18 2008 12:35 utc | 43

Robert Saviano being interviewed on his best seller “Gomorrah” now a major film by Matteo Garrone and winner of the Cannes Grand Prix. (With apologies to Snr. Saviano.)
“Italian organised crime the Money Market is an enterprise that generates war. It was responsible for 10,000 deaths in a 30-year period. This ‘enterprise’ is also one of the most powerful in Italy the world and one of the economic strongholds of Europe the the U.S, with business estimated at 150 billion Euros dollars a year. The entire Fiat Group has a gross turnover of 58 billion Euros year.
“Over the last 30 years, the Camorra The Money Market alone has murdered 4,000 people, more than any other criminal organisation or terrorist group. It has killed more people than than the IRA, ETA, Islamic terrorist groups or Cosa Nostra. The numerous clans that make up the Camorra the Money Markets have divided up a densely populated area that includes the provinces of Naples and Caserta all forty eight statesd. The frontiers of this invisible kingdom expand daily and the clans’ command over it is total.
The Camorra The Money Market doesn’t only earn money through illegal drug and arms trafficking or through the protection racket or through the protection racket, but also by doing business in sectors such as construction, tourism, textiles, transport, fuel, distribution, food, supermarkets, restaurants, shops, cinemas and banking. The immense earning generated by these illegal activities are then reinvested in numerous legal activities that extend well beyond national borders. The Camorra The Money Market has thousands of members in every social class. It ‘employs’ children as drug dealers, lookouts, delivery boys and even as soldiers, who go from being teenagers to killers in no time at all.”

Posted by: Spyware | Sep 18 2008 14:30 utc | 45

Here comes the helicopter: Central Banks Offer Extra Funds to Calm Money Markets

Sept. 18 (Bloomberg) — The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.
The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion “to address the continued elevated pressures in U.S. dollar short-term funding markets.” The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Posted by: b | Sep 18 2008 15:30 utc | 47

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.
Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC’s trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.
“They constructed a mechanism that simply didn’t work,” Mr. Pickard said. “The proof is in the pudding — three of the five broker-dealers have blown up.”

More in the link – intentional allowed those companies to leverage 1:30 1:40

Posted by: b | Sep 18 2008 16:03 utc | 49

I remember when people in Serbia during Milosevic in 90ies realized that something is very wrong and they run to their banks to pick up their money. Then the banks postponed a delivery of money for 5-7 days…then to 14 days…then they simply stopped giving money to the people simply telling them at counter that they do not have money. Some poor bank officers were even bitten at the cash counter (dangerous job it was, I know my father was one of them).Who ever was lucky enough to get his money from the bank soon realized that it’s not going to worth anything unless we buy German marks (mostly) or other foreign currency. Milosevic’s people organized street dealers for this purpose. We came to the point where “price” of the German mark would jump in half an hour while one would try to find best deal on the street. Gigantic inflation and trade stopped…empty supermarket and closed shops. What ever we needed we had to go on a black market and pay in German marks. Our monthly salaries ended up being 10 German marks…price of one bottle of the shampoo on black market. What ever savings we had we had to live on it… At least we protested and tried to get rid of those bandits of ours.
I actually am trying to forget those times and now I am afraid that I may have to live trough similar situation again…God forbid. And I am not in Serbia any more…I headed “west” (Australia, being practically one of USA states…) in order not to have my children and grandchildren going through the same hardship…Unbelievable…

Posted by: vbo | Sep 19 2008 1:53 utc | 51