Here's an interesting comment from the WSJ MarketBeat blog:
Let's think about this. If there was an easy way to tell which firms pose the most potential for systemic risk and if the Fed started to "get out in front" of those situations, what do you think the result would be?
Yeah. Not pretty.
A little uncertainty is a good thing here.
The other important thing to remember in all this is that the size of the AIG "bailout" may be much less than the $85 billion that has people worked up. This is really just an extension of the Fed's credit facilities that have always been available to commercial banks and have recently been extended to investment banks. AIG would not qualify for such help from the lender of last resort, but the harm to the system from its failure would be at least as great as the harm from failures of a traditional bank. Therefore the Fed used its emergency power to extend that credit to them. AIG will essentially reorganize as if it were going through bankruptcy but without the agony to the system that a bankruptcy would cause. There's a very real probability that the Fed could come out ahead on this deal.
Tyler Cowen explains why no one else was willing to do it, and Felix Salmon also agrees with me on the possible upside.
The next big problem in the short term is getting the money market through all of this. No sighs of relief until they are, at least temporarily, out of the woods.
"With this move the Fed and Treasury have blinked in the face of market pressure once again," writes Drew Matus, economist at Merrill Lynch. "They continue to react to situations rather than getting in front of them and now they have created uncertainty about what firms qualify for bailouts and which do not."
Let's think about this. If there was an easy way to tell which firms pose the most potential for systemic risk and if the Fed started to "get out in front" of those situations, what do you think the result would be?
Yeah. Not pretty.
A little uncertainty is a good thing here.
The other important thing to remember in all this is that the size of the AIG "bailout" may be much less than the $85 billion that has people worked up. This is really just an extension of the Fed's credit facilities that have always been available to commercial banks and have recently been extended to investment banks. AIG would not qualify for such help from the lender of last resort, but the harm to the system from its failure would be at least as great as the harm from failures of a traditional bank. Therefore the Fed used its emergency power to extend that credit to them. AIG will essentially reorganize as if it were going through bankruptcy but without the agony to the system that a bankruptcy would cause. There's a very real probability that the Fed could come out ahead on this deal.
Tyler Cowen explains why no one else was willing to do it, and Felix Salmon also agrees with me on the possible upside.
The next big problem in the short term is getting the money market through all of this. No sighs of relief until they are, at least temporarily, out of the woods.
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