Sep 17 2008
The Fed AIG loan and takeover - they’re getting it wrong!
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One thing I need to correct in this whole Fed AIG loan story is the impact this has on the US taxpayer. It has none. Oh sure, you can talk about indirect impacts of money supply considerations, interest rates, etc. That’s not my point. My point is that the US federal government - and thus taxpayer money - is not involved in this deal.
The Fed is a self-contained entity. It’s income statement and balance sheet are not part of the federal budget in any way (aside from the excess interest income on Treasury securities it pays back). That means when the Fed loans money to AIG (and takes an equity stake) or backstops the JP Morgan purchase of Bear Stearns there is no implication to taxpayer money. The federal government will neither make nor lose any money on the deal. The Fed will, but not the government.
This is something that’s driving me nuts. The media is getting it wrong when they suggest this is a government takeover. This is a little peave of mine.
Now the Fannie/Freddie situation is completely different.
Here are some other posts which might interest you:
- Doing the Treasury bailout without taxpayer money
- Please, Please, Learn from History - Diversify Yourself
- Why Politicians Drive Me Nuts
- Takeover of Fannie and Freddie doesn’t change anything, yet
- I just came up with an even better plan!
The Fed was created to provide the nation with a stable and healthy banking system. As I understand it, it hold’s cash reserves from member banks and issues loans to them in order to promote stability. I agree that the media over-stresses the “damage” or “impact” on the taxpayer as it seems that this bailout does not come out of the government budget. Having said this, and besides this point, the issue is that the Fed gave out a loan to AIG with 80% of the company as collateral. The loan holds a high interest rate so it is in AIG’s best interest to find an alternate solution. This “loan” basically gives AIG time to meet short-term debt obligations and sell off assets. Basically, an orderly liquidation/bankruptcy.
Great insight and there is so much “media noise” that it is hard to get the facts straight.
[...] stressing impact on taxpayers in AIG rescue There was an interesting blog post yesterday, The Fed AIG loan and takeover - they’re getting it wrong!, about how people are saying how the AIG rescue hurts taxpayers. The fact is that the Fed already [...]