I did today's edition of "The Call" on CNBCand the news was almost too much to stay on top of AIG and government help or not: Oil off probably due to hedge fund liquidation, the aftermath of the Lehman bankruptcy. You almost forgot there is a Fed meeting today and the decision on interest rates will be out soon.
The feeling of some is the Fed will leave rates unchanged and see if the moves of the past few days help. The Fed expanded the types of securities that can be pledged to the different vehicles set up recently to help get liquidity into the system. Diane Swonk of Mesirow Financial had a very astute observation as to why the Fed should cut today.
If AIG were to fail, or even if they weren't, the level of markdowns being taken on assets of every variety are preventing banks from issuing new loans as the markdowns are requiring ever increasing amounts of capital to be held in reserve. Profits are the life blood of capitalism followed closely by credit. Credit is in perilously short supply in our system. A lower Fed Funds rate equates to a lower cost of capital and if banks had to withhold even more capital to support counterparty trades they may have with AIG then a lower cost would be helpful. I hadn't thought of it in quite that way, but Diane is right.
I can get the notion the Fed wants to keep some ammo for a move tomorrow if needs be. But the issue of AIG's potential failure really trumps all and rates should be lowered today.
I don't believe in government bailouts, but I do think a bridge loan should be extended to AIG secured by one or more of their crown jewel businesses, like aircraft leasing. The size and complexity of a potential AIG bankruptcy makes a move like this necessary.
The common shareholders can be diluted out of existence with the terms of a loan if that's what Paulson feels necessary. The likelihood of a private sector solution is nil, in my opinion. The role of the Fed, Central Bank, Treasury is to provide a measure of stability during stressful times. Like now for example.
- US Considers Aiding AIG; Private Bailout Is Unlikely