Thanks to an incredible increase in the leverage used by various commercial banks, investment banks, and investment firms over the last 6 years, the US capital markets and perhaps the world’s teeter on the verge of collapse. For a good overview and one that puts it in the proper perspective, see this from the WSJ.
This has led the US government to make a $85 billion direct equity investment in AIG, receiving 80% of AIG’s equity. For a critical reaction, see here.
The Fed is also continuing to print money to increase liquidity available to banking institutions.
In recent days, we’ve seen the federal government take the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship, confirming the GSE status that many in the nation’s capital seemed to misunderstand or not understand at all. There was also the loan guarantee the Fed provided to JPMorgan Chase to acquire a faltering Bear Stearns. Amazingly, at least one significant financial market player (Lehman Brothers) was actually allowed to fail.
Lest we forget that Detroit is likely to be heading to DC with hat in hand sometime soon.
These are interesting times, to say the least. And to top it off, we have a presidential campaign nearing its conclusion in less than 50 days, with both campaigns offering some version of increased federal government involvement in the economy, and in particular in the capital markets.
How this plays out is far from certain, but it seems a near certainty that the taxpayers across the fruited plain will be left holding the bag.