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The · Psychohistorian


Finally, some sense

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Finally, some sense from the government on the economic situation: Bush is suggesting that the proper course for GM and Chrysler might be "orderly bankruptcy". If that amounts to Chapter 11 reorganization with the government bridge financing, that might be okay - though hopefully it's done under a bankruptcy judge rather than under a political appointee.

That said, the last time the federal government did something responsible, they changed course almost immediately, so there's still time to snatch disaster from the jaws of victory here.

Detroit Free Press article:
http://www.freep.com/article/20081218/BUSINESS01/81218051/?imw=Y

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On December 20th, 2008 05:08 am (UTC), harrock commented:
You previously mentioned wanting to write a longer piece on the takeover of FNMA and FHLMC (re: causing the financial panic in the first place). Can you point to any references about that? (Or else, elaborate?)

Looks to me like the hot potato has been officially passed, with the Feb/March deadlines.
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On December 20th, 2008 07:37 am (UTC), psychohist replied:
The longer piece I mentioned there is unfortuntely still unwritten. It's intended to more generally cover the topic of recessions and depressions; sorry if I gave the impression that it was going to be mortgage specific.

I also have a post half written saying more about the bailout which will probably appear first.

I accidentally made this post private originally, and it was somewhat overtaken by events even before I made it public. At the time I wrote it, it looked like the Bush administration was favoring a prenegotiated bankruptcy, which in my opinion would be almost as good as no government intervention at all. Now it's looking like they are leaving open whether a bankruptcy will be needed, and indeed whether the government would even provide financing through such a bankruptcy.

As you say, that leaves it up to the next administration to make the final policy decision. There have been reports that there's been a lot of behind the scenes coordination happening in this turnover - as opposed to the last two turnovers, which were rather acrimonious - and this may be an example of that coordination. My guess is that neither administration knows what they really want to do here, so they're leaving it up to the new administration to take their time figuring out what to do.
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On December 20th, 2008 07:59 am (UTC), psychohist replied:
Er, I also wrote these posts, which talked more about the housing crisis. I guess I should learn how to use tags. I'm not sure exactly what you're looking for, but perhaps there's something in one of them?

http://psychohist.livejournal.com/21172.html

http://psychohist.livejournal.com/21390.html

http://psychohist.livejournal.com/22719.html
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On December 20th, 2008 05:56 pm (UTC), harrock replied:
21172 actually contains the explanation I was looking for; I remember reading that now, but it was misfiled in my DB.

Can you point at anything saying (or trying to) how big a hit AIG took from the FNMA/FHLMC credit default swaps, versus other factors that contributed to its liquidity problems? I'm trying to evaluate the causal link there.
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On December 21st, 2008 08:22 am (UTC), psychohist replied:
I can't find a link that addresses that directly. I can find a link that says AIG had credit default swap exposure of $500 Billion - http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/794188688 - and that the bailout triggered contracts covering $1.6 Trillion - http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080909/REG/809099979 . I think what you're asking is what the overlap between those two numbers is. I don't think AIG made that public, though I did read a good article - which I unfortunately can't now find - on how AIG's housing market exposure had risen since Greenberg was forced out as CEO.

Note that I'm not certain the AIG bailout was a bad idea, since it actually seems to have been a liquidity issue and not a balance sheet issue. What I am sure of is that the FNMA bailout was a bad idea, mostly because it was unnecessary. FNMA had a mortgage portfolio that was mostly sound, and they could easily have gone to the markets to raise the capital they needed, rather than getting it from the government.
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