Thursday, September 18, 2008

Debt Destruction & Asset Deflation - Paulson Is The Right Person

There is a lot of misconception as to what the Treasury did with AIG.

Only someone like Treasury Secretary Henry Paulson with his experience in investment banking can engineer a deal like this.

The Treasury basically issued debt securities in the pubic market and then loaned the money to AIG. The Treasury secured the loan with assets of AIG and also placed a high interest rate on the loan.

The high interest rates will force AIG to liquidate its assets to pay down the loan in an orderly manner.

This was not a tax payer bail out. The Federal Reserve as the lender of last resort, relied on its rarely used legal authority under Section 13(3) of the Federal Reserve Act to lend to “any individual, partnership or corporation” in “unusual and exigent circumstance” provided the borrower “is unable to secure adequate credit accommodations from other banking institutions.”

This is not socialism as some pundits are claiming. The Fed is engineering a slow teardown vs a sudden collapse. In a sudden collapse, price discovery becomes highly inefficient and markets cease to function. That is the main reason the feds moved in

You can read more here.

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