Capitalism has always taught us that the market is God. Capitalists have always implored governemnts to de-regulate every industry, to have free markets as the only efficient and fair method to distribute wealth and they have always opposed any sort of government intervention.
And now what have we got?
Northern Rock nationalised
Lehman Brothers gone
AIG nationalised by the most capitalist government in the world.
It seems capitalism works much of the time but when there’s a crisis they turn to regulation to bail them out again.
There are some fundamental problems I have with the policy development in this area:Capitalism concerning real industries can make sense. There are lots of things I don’t want to see de-regulated (transport, water, energy etc.) but there is much to be said for free and fair trade for actual physical products. The money side of capitalism is ridiculous however. Notional trading in financial concepts has brought no benefits to the vast majority of people in society and now it has brought ruination for many of them - not the traders or the previous beneficiaries but the poor who are hurt by the resultant recession.
The stock market thought it could regulate itself. It has failed miserably. There needs to be far more control of this market because if governments need to intervene to bail it out then they should control what gets traded.
What about the Buffet view that the market isnt a true guide of a company, that the market trades on rumour, fear & hope and not on solid fundamentals.
Surprised he hasnt tried to get involved with AIG in some way or other.
[quote=“therock67”]
The stock market thought it could regulate itself. It has failed miserably. There needs to be far more control of this market because if governments need to intervene to bail it out then they should control what gets traded.[/quote]
Well the Fed fairly control what AIG trades now with 79.95 of the shares
What was the strucutre of the takeover? Did they just pay 85bn for control without buying the shares - in other words rendering the shares worthless and eliminating all trade in AIG?
Buffet turned down the chance to buy it anyway. The Fed asked him apparently.
The market probably isn’t a true guide to the worth of a company but the market can kill the company.
[quote=“therock67”]What was the strucutre of the takeover? Did they just pay 85bn for control without buying the shares - in other words rendering the shares worthless and eliminating all trade in AIG?
Buffet turned down the chance to buy it anyway. The Fed asked him apparently.
The market probably isn’t a true guide to the worth of a company but the market can kill the company.[/quote]
no think they took 80% shareholding, thus capturing any potential future value, thats my reading of it but could be wrong.
if Buffet didnt want to buy it says it all, would have been a perfect fit for berkshire hathaway
Quite right. The “market” is looking for year on year growth of 10% plus etc. Exec bonuses are linked to these targets. It is inevitable that you are going to have people cutting corners and getting inventive to meet this growth expectation. Markets always move in cycles, they have done for thousands of years.The concept of having a well run company that generates a good decent return annually and some cash just doesn’t wash with the markets.
Can anyone please save me the bother of going and reading up on it by explaining why the Fed Reserve intervened to save AIG but not Lehman Brothers? What differentiated them?
Basically, Lehman Bros not that important in overall scheme of things. AIG more interlinked with wider economy and potential for greater knock-on further defaults.
Serious question marks over the Fed’s credibility after this move. They effectively said at the weekend when Lehman asked for help that they were no longer using taxpayers money for bail outs, then they dish out 85bn 2 days later. After Bear Stearns, Fannie Mae, Freddie Mac (what ridiculous names by the way) and now AIG all getting help i’d say Lehman are feeling fairly hard done by and a lot of people will be asking questions as to what the criteria for a bail out is. The move will also open the door for a lot of other companies to come looking for help.
I read an interesting article which made the point that instead of handing out cash to companies that made bad bets, which could encourage more risky behaviour if companies think they have a safety net, the Govt should be buying up mortgages and re-writing the terms to ensure that ordinary households are not buried in debt. Not sure how easy that would be in practice though.
I can see why the Fed stepped in for AIG though as the effects of a failure would have huge implcations for the Global, aswell as US, economy given the thousands of companies who would rely on AIG. Also they’re so big in the Credit Default Swap market that a failure would be potentially catastrophic for an already struggling market.
At the end of the day however, if the Fed continues with bailouts like this it will effectively mean that profits from large financial institutions are privatised and losses are socialised which isn’t right.
