Don't bail dude!

Guest columnist Dime $ack

It's been a crazy couple of days. It's hard to say what the AIG rescue will do. It's more of an organized liquidation than a bailout. The stockholders are wiped out, and the bondholders definitely won't get all their money back. The govt will just organize the sale of assets. They were really reluctant to do it, because it sends a bad signal, it puts tax dollars at risk, and it stretches the govt. I'm more curious what the heck is going to happen to Fannie/Freddie.

I don't know what other big companies could get a bailout like AIG. The remaining big banks seem alright (Goldman, HSBC, JPMorgan, Deutsche, etc). WAMU is probably going down though if they can't find a buyer (rightfully so - they made TONS of those garbage liar loans to subprime homeowners). The main thing with AIG was the fact that they insure tons of bonds. When they do that they are substituting their own credit for the insured bond. So if a somewhat risky company issues bonds, that company can buy insurance from AIG, which lowers the premium they have to pay to bondholders. If AIG disappeared, all that insurance goes away, and tons of debt gets downgraded, which would crush the money and debt markets. This is what the Treasury and Fed were trying to avoid. Plus it's not as bad of a company as Lehman, which was levered 35 to 1. AIG has a decent insurance business. They've just got a liquidity crisis on their hands.

The big news today was The Reserve "breaking the buck". The Reserve is a huge money fund company (lots of big companies have accounts with The Reserve). Money funds never go under $1 per share, but the Reserve had to yesterday because it was holding Lehman debt in its big prime fund. So today everyone was selling money funds and all corp debt and buying treasury securities. Banks don't want to lend to each other either, so Libor went way up overnight. Many subprime loans are based on Libor, so a lot of adjustable rate mortgages could be affected if rates stay elevated.

It's a huge crisis all related to subprime and the credit crunch. I don't think either presidential candidate really understands it - much less has an idea how to fix it. McCain talks about cleaning up wall street, but that doesn't really mean anything (govt can't control wages (besides min wage)). Obama wants tighter regulation, which I'm sure we're going to get no matter who is president. It's kind of funny how totally uninvolved the current president is. I think he made a comment or two Monday after the big weekend, but not much. But Bernanke and Paulson are working their asses off. Only time will tell if they're making the right choices.

What's even MORE surprising is that McCain is doing so well. People are freaking stupid one-issue idiots. If I had a company that had been run like this country over the last 8 years everyone at the top would get fired. Even if it is all random and the president can't control all this stuff.

We'll see. Interesting times. Will be really interesting to see how the consumer reacts over the next few months. Maybe it will all blow over. Maybe not though.