I spoke too soon yesterday. After Treasury Secretary Paulson apparently refused to bail out AIG, the Federal Reserve stepped in and cut the mortgage giant a check for $85 billion in exchange for 80 percent of AIG shares. That $85 billion of taxpayer money is just a loan, we are told, but I don’t quite understand the distinction between and loan and a handout when the whole trigger for this loan was that AIG is unable to pay back its other loans.

Once again, this is being covered everywhere in the MSM. Here’s a good overview.

Although a cut in the Fed funds rate had become widely expected by yesterday, the Fed ended up holding rates steady. Perhaps they are trying to limit themselves to one Wall Street bailout per day.

Today is a new day, however. The Treasury has just announced it’s going to borrow some extra money to hand over to the Fed.

The Fed, via its assorted acronym-tastic lending facilities, has been lending out money (or Treasuries, aka government bonds, which are just as good) to financial institutions in exchange for assets of more dubious value such as mortgage-backed securities. As I noted in yesterday’s post, they just announced that they will accept even more questionable collateral and that, for the first time in history as far as I know, they will accept stocks as well.

These lending facilities allow financial companies to get money (temporarily, admittedly) in exchange for their assets without having to sell them, thus propping up asset prices. The problem is that the Fed has run a little low on funds as a result of all lending. So the Treasury is borrowing more money — to be eventually be paid back by you, the taxpayer — so that the Fed’s handouts to Wall Street don’t miss a beat.

Despite the government’s tough talk earlier in the week, the bailout machine appears to remain fully operational.


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