A.I.G.

The U.S. government has just now moved to bail out A.I.G. In this case it may not be a pure bailout: the government issued an $85 billion loan in return for warrants for 80% of the company. To put $85 billion in perspective, it’s the cost of the was in Iraq for eight months. So it’s a lot of money, but it’s not completely insane, particularly considering that the Bush administration is keeping the cost of the Iraq war out of the budget and paying for it with emergency expenditures. There is also a decent chance that the loan will in fact be repaid: if the credit markets ever settle, there is every reason to expect that A.I.G. will be able to stay afloat.

Still there is something horribly wrong with watching hedge fund managers put hundreds of millions of dollars into their pockets, and to then discover that the U.S. government must assume the debts of the people who paid that money.

The government is hoping to create a bottom for the market, but I don’t see why taking these steps will do it. There is a mania on Wall Street with investors short selling companies which look vulnerable. This rapidly becomes a self-fulfilling prophecy, as these sales make the company move vulnerable. But the expectation that the government will step in keeps people buying the stock even as prices fall. If that expectation were not there, people would stop buying: the stock would become illiquid. That would leave the companies unable to raise cash by selling stock, but, so what? They wouldn’t get much anyhow. And a private sale would still be possible.

What the government is saying right now is that if you lose your job because of a downturn, too bad. If you lose your company, the government will buy it from you, and at least you’ll keep a few million dollars or more. We all know that the rich get different treatment in the U.S., but it’s sort of shockingly obvious right now.

And since the short sellers will keep moving from company to company, there is no bottom to this market. There is no reason for it to stop until all the companies which purely make money from money, and thus have no underlying measurable value, have been decimated.

The only bright side I see to this is that the market doesn’t turn around until everybody is convinced it will keep going down much longer.