AIG Bailout: The Financial System Hangs in the Balance

Good Afternoon Everyone!

Its been quite a day in the markets. All eyes are now focused on AIG. It looks like the Fed might blink and bailout AIG:

"Sept. 16 (Bloomberg) -- The Federal Reserve is considering extending a ``loan package'' to American International Group Inc., the insurer facing a cash shortage, according to a person familiar with the negotiations.

The stance by federal regulators is a reversal from a position they held as late as last night, and people with knowledge of the talks are ``cautiously optimistic,'' said the person, who declined to be identified because negotiations are confidential.

The person gave no timetable for reaching an agreement or estimate on how much money New York-based AIG would need. New York Fed spokesman Andrew Williams declined to comment."

My Take:

This is the ultimate game of chicken between the Fed and the private banks. The banks are holding out on offering a loan to AIG to see how the Fed reacts. Now that the Fed has blinked, the banks have come out with a more hawkish tone in terms of lending money to AIG.

When its all said and done, I expect the Fed to give in and extend some type of hand to AIG. I think the Fed is afraid too see what the ramifications of an AIG failure would be given the lack of confidence that now grips the markets.. Lets see how this all plays out. If AIG fails, all hell is going to break loose in the financial markets.

Fed: No rate cut!

Kudos to the Fed. Maybe they are finally starting to get it. Here is the news on the Fed holding Rates:

"Sept. 16 (Bloomberg) -- The Federal Reserve left its main interest rate at 2 percent, rebuffing calls by some investors for a cut after Lehman Brothers Holdings Inc.'s bankruptcy shook markets worldwide.

``Downside risks to growth and the upside risk to inflation are both of significant concern,'' the Federal Open Market Committee said in a statement in Washington. ``The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.''

Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending and aim monetary policy at a longer-term economic forecast that may still show the economy skirting a recession. Stocks fell after the decision, while the dollar gained and Treasuries remained higher."

My Take:

I think the Fed decided they needed to save some bullets for the next blowup. The obsession on AIG gave them the opportunity to take a breather without taking too much heat. This was the right call and it was a unanimous decision.

This deleveraging is going to destroy many financial firms. The Fed knows there are many more battles down the road. I think they also are sending the message to Wall St. that there is a line of moral hazard that they refuse to cross.

Here is another reason why the Fed may have decided to hold rates at 2%. Well take a look at the TIC report(Treasury International Capitol) for July:

"Treasury International Capital (TIC) data for July 2008 are released today and posted on the U.S. Treasury website (www.treas.gov/tic). The next release, which will report on data for August, is scheduled for October 16, 2008.

Net foreign purchases of long-term securities were $6.1 billion.

Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.

U.S. residents sold a net $31.7 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $8.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $8.4 billion. Foreign holdings of Treasury bills decreased $4.4 billion.

Banks’ own net dollar-denominated liabilities to foreign residents declined $58.1 billion.
Monthly net TIC flows were negative $74.8 billion. Of this, net foreign private flows were negative $92.9 billion, and net foreign official flows were $18.2 billion."

Final Take:

The Boys on Wall St. all want a cut because it helps bailout the financials. What the Fed is focusing on is the larger picture IMO. This data had to scare the hell out of the Fed.

WE CANNOT afford to lose our foreign buyers of treasuries. Foreigners are getting increasingly tired of all of the lies, fraud, and manipulation on Wall St. As you can see by this Fed report, they are starting to walk away! The game is over if this continues folks.

Bottom Line:

The fact the DOW is up today is ridiculous. Stocks are soaring based on a potential AIG bailout. The huge bounce in the last few minutes leads me to believe that the deal is probably already done.

If Wall St. had a brain, they would get away from there minute by minute trading and start focusing on the fact that foreigners are starting backing away from our debt. The TIC report blew me away folks. This is a frightening development.

The "bubble boys" just want to cheer on the bailout. This is just more simpleton thinking by a bunch of pump monkeys. Party on boys because you have very few days left.

This "black hole" of debt that's about to suck away our economy will soon turn those cheers into jeers. I will be back on with any AIG news.