2 posts tagged “aig”
One of the most important issues facing modern liberal democracy is the funding of political parties. Part of this conundrum is that political parties are very political and will find it hard ever to give up temporary advantage that they might enjoy for the long term common good of the country. The funding parties also mirrors the lobbying something that has great and profound significance in Washington D.C.
But we are reminded that it is possible to get cross party consensus as it was revealed this week that both Republicans and Democrats got AIG to voluntarily cease professional lobbying over the contents and nature of rules that directly affect the company going forward. This was a preventive measure against what would have been public outrage at public money being recycled so transparently into the political world. Whoever is the next President will have to address these issues in a forthright and straightforward manner. Both lobbying and political funding are miniscule parts of an otherwise enormous spending machines (it has often been noted that Americans spend about as much on chewing gum as on the political process) yet they have the power to corrupt the political process. They also have the power to degrade the seemliness of political process in the view of the American people. These are issues, therefore, on which it is right and proper for a President to lead.
The gyrations of Wall Street are far from finished. The Federal Reserve’s insertion into the ownership structure of AIG was as much a measure to avert international market meltdown as well as a hard-nosed business deal. The Fed effectively took control of 79.9% of the company for a loan facility of 85 billion dollars. This is very different from the Bear Stearns deal that may well cost the Fed a great deal (the bank’s losses being socialized) but the Fed does not gain from any bounce back in the value of that institution (the profits being privatized).
The AIG deal results in a senior loan on the balance sheet of the company: And the cost is considerable. AIG is being charged 850 basis points on top of the three month LIBOR rate. This is a substantial amount of interest. This will be an incredible burden on the company but it is also a reflection of the fact that its underlying assets are valuable and that it simply needs the liquidity to meet its obligations while it sells these off. This was a deal that was struck at ‘one minute to midnight’ so the Fed could have dictated any terms that it had wanted.
All eyes now will be on how quickly the company can be either unwound from its global positions, recover the value of its once enormous balance sheet, liquidated or extricated from the grasp of the Fed. The truth is that no one knows which way this will go. Recovery will restore faith in the markets, failure will erode confidence in the markets. Ultimately this crisis will affect not only the primary landscape of the financial services space but also the secondary regulatory environment that politicians impose on the markets. Calls by politicians for more ‘security’ or ‘certainty’ in the market cannot be regulated for but must be continuously priced by the market on a risk adjusted basis.
The new economic landscape will take time to emerge. Investment banks seem to have had their day. They can no longer withstanding the volatility that the market can create. More regulation seems inevitable as politicians will need to be seen to be doing more ‘policing’ of the markets. But care must be made to appreciate that (although somewhat counterintuitive) it is volatility that, in the long run, creates the platform for the most stability in our socio-economic environment.
