Wednesday, September 17, 2008

It Is Bigger Than AIG

As I have written before, this stuff is not rocket surgery. Building a sound financial system with the proper controls is well within our reach. It is a matter of will. Unlike cancer and other serious health problems that we are still working to unlock the mysteries of, and thus their cure, the financial field is more like correcting the department of weights and measures.

Yesterday we read that the huge insurance company commonly known as AIG (American International Group) has been rescued with an infusion of cash. Why did they need cash? Let me explain.

AIG sells insurance to insure municipal bonds. That means, if you own a municipal bond that is insured by AIG and that municipal bond can not pay the principal and interest, AIG will step in and pay. This is known as bond insurance. Now Moody’s Investor Service and Standard & Poors, who also rate municipal debt, lowered AIG’s bond rating, and as a result of this action by the rating agencies, (I hate that term rating agencies, but more about that later), AIG was required to come up with more cash in reserve to pay off the municipal debt, IF, the municipal debt would go into default. Mind you, nothing has happened yet, no one defaulted, but the way things work, as soon as AIG’s bond rating was lowered by the rating agencies, they, AIG, needed to come up with new cash. It was this new cash that put them in play and forced them to seek help.

What is wrong with this picture? The companies that give the bond ratings for companies like AIG, are the same companies that passed out AAA ratings like candy for all those mortgage bonds that resulted in the mortgage bond market meltdown. Do you see where I am going? The problem of an independent rating service controlled by the Federal Reserve Bank is what is needed. If the US Government is going to jump in and rescue every major financial firm that gets into trouble, then I think the responsibility of calling the game should rest with the league officials. In this case the league official is the Federal Reserve Bank. The rating agencies, and I hate that they are called agencies because they are companies with a profit motive, need to have the responsibility of calling the game taken away from them. They are, in my opinion, a miserable failure.

Now here is the sad part, everyone on Wall Street knows this and they have known this for years. Now, perhaps you can understand why this should be turned over to the Fed just like weights and measures are run by the state government and not by private industry. Do you want the oil companies checking the gas pumps to make sure you are getting what you pay for? At $4 a gallon, I think you want an independent checker of a true gallon. Wall street needs the same thing, an independent checker for the issuance of debt ratings. If the Fed is doing it, and the profit motive is removed from the table, then everyone can be assured that the research and study went in before the rating went on.

See, this is not rocket science or brain surgery, despite what those guys in those nicely tailored suits tell you. What I have just laid out for the Fed, would, I guarantee, prevent another bond market meltdown. There would be no mystery as to how many studs were in the wall. We would know exactly because the Fed would take the time and money to check it out. Here I go again spending the people’s money for more Federal Reserve Bank workers. But, what are we, the taxpayers spending on all these bailouts? Ask yourself, which is cheaper?

Now ask yourself, why is not this going to happen? The sharks on Wall Street at the investment banking firms like to eat fresh meat, that’s why. The privatization of profits and the socialization of losses, that is what Wall Street wants. These people care about one thing, money. Greed is their religion. And, they will get away with it until someone stands up to them and changes the game.

I do not think the Republican Party has the balls to stand up to Wall Street. The Republican Party is in bed with Wall Street. That is why I am voting for Obama-Biden. I hope you will join me.

Stay tuned.

1 comment:

moneythoughts said...

I really tried to make it simple today; however, unless someone works in the field, it doesn't sound logical. That's right, it is not logical. The companies that rated the sub-prime mortgage bonds and passed out AAA ratings, now have lowered the debt rating on AIG. By lowering their bond rating on their own bonds, their corporate debt, they now have to come up with additional cash in reserve to cover the insurance they sold on other bond debt. The US Government is getting a 79.9% interest in AIG for the loan of $85 billion. Now, I agree that this should be done. There are too too many accounts involved, like lots of people who would stand to loose. Why aren't these so called rating "agencies" be investigated? We need lots of people to ask this question.