Fed is already $5.25 billion in the hole on AIG, Bear Stearns 'investments'

Posted Jun 10th 2009 5:00PM by Zac Bissonnette
Filed under: Bad News, Amer Intl Group (AIG)

Remember when the United States government took a bunch of your money and bought crap securities from Bear Stearns and American International Group (NYSE: AIG) -- and promised we wouldn't lose money? The securities were temporarily undervalued because of an "illiquid marketplace" and we'd earn handsome returns.

Ah, yeah. About that. The Associated Press reports that "The Federal Reserve lost $5.25 billion in the first quarter on the securities it acquired with last year's bailouts of Bear Stearns and insurer American International Group, according to a report Wednesday. The loss on the holdings, which include mortgage-backed securities, reflected a decline in their value as the recession carried over into the first three months of this year. The cumulative loss on the Bear and AIG holdings comes to $16.46 billion since they were taken over last year."

Of course none of this is especially surprising to any of the rational people who were following this: The Federal Reserve acquired assets that literally no one else wanted, paying prices far higher than any private, third party operating out of self-interest would have paid. That's the point of a bailout: If the terms of the deal were fair, someone else would have fronted the money. As the buyer of last resort operating out of an altruistic desire to prop up the market, the Federal Reserve will always make lousy deals. It might be that it's a good trade-off if it means economic stability, but it was pretty disingenuous of Bernanke and Paulson to try to sell this as something other than a bailout.

The population of the United States was 304,059,724 in July of 2008, so losses of $16.46 billion works out to a loss of $216 for every family of four in the country: Could you have done something better with that money?

Tags: AIG, Federal Reserve, FederalReserve, inthenews, texpayer bailout, TexpayerBailout

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Reader Comments (Page 1 of 1)

6-10-2009 @ 5:18PM

John Wall said...

Maybe we should count our lucky stars. Bernanke and Paulson originally wanted all $700,000,000,000 of bail out money to be used buying these assets from banks at "something near hold to maturity prices".

Actually I think that the real problem is that we still have no formalized system for reporting asset performance under specific mortgage backed securities. Who ever heard of an asset having no market when sufficient information was availble to all investors.

Perhaps the securities bought by AIG are really worth more than even their recent mark to market price would indicate.