Guest Author - Tony Daltorio
This is the third article in a row I have written about the government bailouts of major US financial institutions. But I feel it is important to keep everyone informed. After all, we are all heavily reliant on these financial institutions.
Just in the past week, we saw the 158 year old Wall Street firm Lehman Brothers headed for bankruptcy and the shotgun marriage of Bank America with Merrill Lynch. We saw gold enjoy it's largest 1-day rise ever.
We saw the US Treasury's 3-month treasury bill fall to an incredibly low yield of 0.04%, nearly zero! This reminds me of Japan where they have had near-zero interest rates for nearly two decades because of problems in their financial system.
Also this week we saw the nation's oldest money market fund, the Reserve Primary Fund, "break the buck". Money market fund shares are normally kept at a rock-solid $1 per share mark. But shares of the Reserve Primary Fund at now valued at $0.97. Investors have lost 3% of their money.
The next financial firm to hit the skids was AIG. AIG is the world's largest insurance company with policy holders in every corner of the globe. The Feds have come to the rescue of AIG. They gave AIG an $85 billion "loan" in exchange for approximately 80% of the company.
This is similar to what the government did when they bailed out Fannie Mae and Freddie Mac. The shareholders of AIG are left with stock that has is valued at about $2 a share. This company's stock, last year, was valued at nearly $180 billion! Now it is nearly worthless.
Why did the government decide to bail out AIG? Many of AIG's customers are located overseas. A bankruptcy would have triggered panic in the overseas holders of AIG's insurance policies. There were already massive lines of people looking to cash out their policies in places like Singapore.
Just like with Fannie Mae and Freddie Mac, foreign creditors have again forced the hand of the American government to use taxpayer dollars to guarantee the value of their financial investments in the US.
The US is a massive debtor nation and is totally dependent on overseas funding just to "keep the lights on" in the country. When a nation is in such a situation, you do the bidding of the creditor. What choice do you have?
Who is next on the list to be bailed out? There are numerous choices. Famed billionaire investor, Wilbur Ross, specializes in buying distressed assets. He stated the other day that he expects about 1,000 banks to fail across the US!
Next perhaps on the list to fail is Washington Mutual or WAMU, the largest US savings & loan. Their stock has already plunged to only $2 a share in value. The failure of WAMU would again cost taxpayers quite a bit.
Washington Mutual has approximately $143 billion in insured deposits as of June 30,2008. Yet the FDIC, which is supposed to insure these deposits, has only $45 billion, and perhaps less, in their insurance fund. So US taxpayers will be on the hook for at least another $100 billion!
In a future article, I will discuss why this is happening. In brief, the problems were caused by human greed and arrogance.
