Bear Stearns, Lehman Brothers, and Merrill Lynch. As the world watched, some of the biggest names on Wall Street disappeared - literally overnight - and reports now say the only certain thing we can know is that the "era of unbridled free-market economy in the US has passed €“ at least for now."
Many are asking: "Is this the beginning of the end? Or is it just a painful, but necessary correction of the €œexcesses of recent years?"
Barclays, the global financial services provider, has tentatively agreed to buy Lehman Brothers' capital markets units for $1.75 billion. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale, and Morgan Stanley, one of the last two investment banks left standing, also announced it had lost "massive amounts."
But perhaps most shocking of all was the announcement that the American Insurance Group (AIG), one of the world's largest insurance companies, was prepared to declare bankruptcy and had to be "bailed out" by the Federal Reserve. Had AIG been allowed to fall, "the spillover effects could have been incredible," Princeton economist Uwe Reinhardt told the Times.
The New York Times called it "the most radical intervention in private business in the central bank\'s history," when the U.S. Federal Reserve first announced an $85 billion rescue plan for AIG.
At this stage, the U.S. government had planned to buy AIG stock, effectively giving taxpayers an 80 percent stake in the company, reported Foreign Policy.
The Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank also announced that they would coordinate measures to improve the liquidity (money made available at low interest rates) conditions in global financial markets.
In addition, the Federal Open Market Committee (FOMC) authorized a $180 billion expansion of its "swap lines," (temporary reciprocal currency arrangements) to "unlock the credit markets that froze up when banks around the world essentially stopped lending to one another in dollars," reported Foreign Policy.
None of these actions, however, brought relief to the crisis, and late on Thursday, September 18th, the head of the Treasury and the Federal Reserve began discussions with Congressional leaders on what "could become the biggest bailout in United States history," stated the Times.
While not fully worked out, this new plan will most likely authorize the government to buy"distressed mortgages at deep discounts from banks and other institutions." "The root cause of distress in capital markets is the real estate correction and what\'s going on in terms of the price declines in real estate," Treasury Secretary Henry Paulson said after the meeting. "Until we get stability in the housing market, we\'re not going to get stability in the financial markets."
The government has decided to step in and "take on" bad debts in the biggest state intervention since the Depression, giving "the US financial system its biggest makeover since the 1930s," wrote the Wall Street Journal. "This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them," Anthony Sabino, professor at St. John\'s University, told The New York Times.
In a CNN commentary, Columbia University and Nobel Peace Prize winner in Economics, Professor Joseph E. Stiglitz, stated: "This is not the first crisis in our financial system, not the first time that those who believe in free and unregulated markets have come running to the government for bail-outs. There is a pattern here, one that suggests deep systemic problems €“ and a variety of solutions."
Source : http://www.galtglobalreview.com