Get Your TARP Before it is Too Late

Last one in is a rotten egg.

I moved to Florida just before the run of monster hurricanes. I had to look on as shortage of tarps caused additional hardship. People with leaking roofs couldn't get tarps, so when it rained the water just poured through the roof causing additional damage.

Now I find myself wondering if there are enough TARPs (Troubled Asset Relief Program) to go around.

The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies.

It appears that if you own a bank holding company or a savings and loan, you are qualified for a TARP.

A number of life insurers, including Hartford Financial Services Group, Genworth Financial, and Lincoln National bought savings and loans last fall so they could call themselves banks and qualify for government funds. Some existing insurance companies like Prudential Financial and MetLife already qualify.

Soon these insurance companies will be crying "pour mouth" because they aggressively sold variable rate annuities tied to the performance of the stock market.

It won't be much longer before the supposedly good part of the business at AIG--insurance--starts to turn south and puts them in even more jeopardy.

Sooner or later, the Treasury is going to run out of TARP. Reminds me of the saying--"last one in is a rotten egg".

If the stock market returns to the lows it is going to be ugly. The big question right now is, will inflation click in soon enough to save the day?

Stay tuned.

There is a good article in the Wall Street Journal where you can read more about this topic --

U.S. to Offer Aid to Life Insurers.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

AIG Trick me once shame on you, trick me twice shame on me

Feel free to substitute the appropriate word for the word--trick--in the headline. Be creative.

You really have to ask yourself--are the nuts running the nut house?

How long before the taxpayers take to the mall in Washington, DC to show what we really think. We own the company. Isn't it time to replace the board and management?

I'll remind everyone. When we GAVE the first $85 billion to AIG it was with the understanding that it would be paid back within two years.

Trick me once shame on you, trick me twice shame on me.

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60 Minutes Ben Bernanke's Greatest Challenge (Video and Text)

60 Minutes features a rare interview with a Federal Reserve chairman - the first in 20 years - Bernanke tells correspondent Scott Pelley what he thinks went wrong with America's financial system, how it caused the economic crisis, what the Federal Reserve is doing to help fix it and when he expects the crippling recession to end.

In the interview, Bernanke also talks about the failure of Lehman Brothers, the rescue plan for AIG and the Fed’s extraordinary actions taken since the beginning of the economic crisis. The Fed Chairman also discusses how regulations might change in the future.

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"Mr. Chairman, I'm gonna start with a question that everyone wants me to ask: when does this end?" 60 Minutes correspondent Scott Pelley asked Bernanke.

"It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."

Asked if he thinks the recession is going to end this year, Bernanke said, "In the sense that this decline will begin to moderate and we'll begin to see leveling off. We won't be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters."

"But you wouldn't say at this point that we're out of the woods?" Pelley asked.

"No," Bernanke replied. "I think the key issue is the banking system and the financial system."

"Unemployment, as we sit here, is about 8.1 percent. I wonder, do you expect double digit unemployment?" Pelley asked.

"Well, it's hard to forecast exactly where we're going. Unemployment is rising. Job losses are still very severe. And no doubt, the unemployment rate's gonna go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a slower pace of decline, and eventually, a stabilization that will set the basis for a recovery," Bernanke said.

"You seem to be saying that we're not heading into a new American Depression?" Pelley asked.

"I think we've averted that risk. I think we've gotten past that and now the problem is to get the thing working properly again," the chairman said.

Bernanke, age 55, has been chairman of the Federal Reserve Board since 2006. He had previously served as a Fed governor, then chairman of the President's Council of Economic Advisers, before being appointed as Fed chairman by President George W. Bush.

For this interview, he opened up the Fed headquarters, rarely seen by the public. It's a monumental building along the National Mall. Construction started in 1935 in the depths of the Great Depression.

"You know Mr. Chairman I think the Federal Reserve, for most people, is a mystery," Pelley remarked.

"Well, it's an institution that people don't hear so much about but it's a very important one. It manages monetary policy for the country. It's one of the main tools we have for stabilizing our economy and keeping prices stable," Bernanke said.

Asked when it was founded, Bernanke told Pelley, "The Fed was created by Congress in 1913. And its original purpose was to deal with financial panics, which is what we're doing right now."

Bernanke's crisis started in 2007 with the mortgage meltdown; lenders began to fail. Bernanke cut interest rates repeatedly. In 2008, the Fed stopped the collapse of Bear Stearns by arranging a sale to another firm.

But then came the end of Wall Street as we knew it. Mortgage giants Fannie Mae and Freddie Mac were seized by the government. On Sept. 14, Merrill Lynch was sold in distress. The next day, the 158-year-old investment bank Lehman Brothers failed

"You didn't rescue Lehman Brothers. It set off a worldwide panic when it went bankrupt. And I wonder, looking back, whether you think that was a mistake," Pelley asked.

"There were many people who said, 'Let 'em fail.' You know, 'It's not a problem. The markets will take care of it.' And I think I knew better than that. And Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis. Now was it a mistake? It wasn't a mistake for the following reason: we didn't have the option, we didn't have the tools. All the Federal Reserve can do is make loans against collateral," Bernanke replied.

The day after Lehman, Bernanke's Fed did something astounding: it loaned $85 billion to a company that wasn't a bank at all - American International Group (AIG), the global insurance giant that was also involved in backing risky mortgage investments. Bernanke says, unlike Lehman, the Fed could make the loans based on good collateral in AIG's portfolio.

"There have now been four rescues of AIG, $160 billion. Why is that necessary?" Pelley asked.

"Let me just first say that of all the events and all of the things we've done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system," Bernanke said.

"You say it makes you angry?" Pelley asked.

"It makes me angry. I slammed the phone more than a few times on discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but the stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy," Bernanke explained.

By September, Bernanke and then-Treasury Secretary Hank Paulson went to Capitol Hill to urge a massive bailout of the banking system, which lawmakers soon passed.

Asked how close of a call it was, Bernanke said, "It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the banks in the first week of October. And it was in the second week of October that the crisis reached its peak. If we had not had those powers, we could have had a much, much worse outcome. So it was a very dangerous situation."

"Was anyone on Capitol Hill skeptical? Did they push back at all, you know, 'Mr. Chairman, it's probably not quite that bad'?" Pelley asked.

"Well, I do remember one conversation I had where I was addressing a caucus of congressmen. And a congressman said to me, 'Mr. Chairman, you know, I'm talking to bankers in my town. I'm talking to shopkeepers in my town. And they say things are normal. Nothing's going on. We don't see any problem.' And I turned to him and I said, 'You will,'" Bernanke recalled.

That second week of October, the Dow fell 18 percent - its worst week in history. At that point, $8 trillion had been lost.

In the crisis, Bernanke had freedom to act immediately - he doesn't need permission from Congress or the president. While they debated on Capitol Hill, Bernanke cut interest rates nearly to zero; then he used Depression-era emergency powers to launch a dozen rescue programs of his own. There was support for money market funds, mortgages, short term lending to small business, and support for auto loans, student loans and small business loans - commitments of a trillion dollars, doubling the size of the Fed's balance sheet.

Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

He's not kidding about printing money: the Fed issues U.S. currency, which is why it says "Federal Reserve Note" on all the bills in your wallet. The Treasury Department's Bureau of Engraving and Printing is just a few blocks from Bernanke's office. It prints the money at the Fed's request.

The Fed's mandate from Congress is to put enough money i the system for maximum employment, but not so much that it sets off inflation.

The Fed actually pays for itself and returns billions in profits to the Treasury.

In a sense, Bernanke has been preparing for this emergency his whole professional life. He got a PhD in economics from MIT. He chaired the economics department at Princeton, where his specialty was the Great Depression.

He's among many economists who now believe it was the Federal Reserve itself that helped turn a recession in 1929 into a global calamity.

"They made two mistakes, basically. One was they let the money supply contract very sharply. Prices fell. Deflation. So monetary policy was, in fact, very contractionary. Very tight during that period. And then the second mistake they made was they let the banks fail. They didn't make any strong effort to prevent the failure of thousands of banks. And that failure had terrible effects on credit and on the ability of the economy to right itself," Bernanke explained.

Bernanke told 60 Minutes we were close to a second Depression and he is determined to not let the major banks fail on his watch.

"One of the things that I think many people watching this interview don't understand, is why there are multiple bailouts, four bailouts of AIG, three bailouts of Citigroup. There is a sense that this is a band-aid approach, that we're not getting to the root of the problem," Pelley remarked.

"Well, part of the issue is that, you know, the economy has gotten a good bit worse. You know, the first part of the crisis was subprime and other assets that were toxic. Now, we're in a second phase, which is that the economy is very weak," he said. "So the economy's weakness has meant that some of the initial attempts to stabilize the banks haven't been enough, and we've had to do more."

"You know, Mr. Chairman, there are so many people outside this building, across this country, who say, 'To hell with them. They made bad bets. The wages of failure on Wall Street should be failure,'" Pelley remarked.

"Let me give you an analogy, if I might," Bernanke said. "If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on."

Bernanke told Pelley that "fire" is still burning.

Asked if all the big banks the Fed regulates are solvent, Bernanke said, "I believe they are, yes. But we are doing a stress test right now, where we're looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect. And what we plan to do is to say how much capital would each bank need to be well capitalized. Not just solvent, but well capitalized, even in these more adverse scenarios."

"Are you committing in this interview, that you are not going to let any of these banks fail? That no matter what their balance sheet actually looks like, they are not gonna fail?" Pelley asked.

"They are not gonna fail," Bernanke said. "But what we can do, should it be necessary, is try to wind it down in a safe way."

In other words, Bernanke thinks government should stabilize failed financial companies and take them apart slowly. "So, for example, in the case of AIG, we've prevented a bankruptcy, because of the chaos that would create. But we're also demanding that AIG divest itself, sell off its subsidiaries, and use the proceeds to pay back the government," he said.

"What are the dangers now? What keeps you up at night?" Pelley asked.

"I think the biggest risk is that, you know, we don't have the political will. We don't have the commitment to solve this problem, and that we let it just continue. In which case, you know, we can't count on recovery," Bernanke said.

The Fed estimates the wealth of American families fell 18 percent in 2008, the worst since the Great Depression.

Ben Bernanke is doing things with the Federal Reserve that have never been done before. It may be because he's not a creature of Washington or Wall Street.

He grew up, middle class, the smartest kid in a town now falling on hard times. He told Pelley, because the Fed is so powerful, it should be more open.

Bernanke meets with his six fellow governors of the Federal Reserve - all of them appointed by the president of the United States - at the Fed's headquarters. Bernanke also chairs the Federal Open Market Committee, which decides interest rates.

Those meetings, which take place inside the Fed’s boardroom in Washington, are secret. Asked why, Bernanke took Pelley inside the boardroom and explained, "If we held those things with a TV camera on us it would create lots of volatility and problems in the market. But I should say that, you know, we've come a long way. In 1994, when the Fed made a policy decision to change interest rates, wouldn't even announce that we made a change. But now, after every meeting, we put out a statement, say what we did, explain what we did, why we're doing it. And three weeks later, we put out minutes to describe everything that happened in the meeting. So we're becoming much more transparent."

"When I called and proposed this interview about a year ago, your representative laughed out loud. And said, 'The Fed chairman never does an interview.' Why are you doing this?" Pelley asked.

"Well, it's an extraordinary time. It's an extraordinary time. This is a chance for me, I think, to talk to America directly," Bernanke said.

It's also a chance for America to understand where he comes from.

Ben Shalom Bernanke grew up in one of the few Jewish families in Dillon, S.C., today a town of 6,000 people.

His grandfather, Jonas, immigrated from Eastern Europe, landed at Ellis Island, and came to Dillon to start a drug store.

"Our family came here in 1941. My grandfather, Jonas Bernanke bought this building, made it to the JB Drugs, after his initials," Bernanke told Pelley.

Later, his father and uncle took over the store which has since become a restaurant.

"We're sitting on this corner where your family's store was. And I see it's Main Street. People feel like guys like you are tuned into what happens on Wall Street and you forget places like this," Pelley remarked.

"I come from Main Street. That's my background," Bernanke said. "I've never been on Wall Street. And I care about Wall Street for one reason and one reason only because what happens on Wall Street matters to Main Street. And if we don't have stabilization in the financial markets, if we don't take the steps necessary to make sure that credit is flowing again, then my father couldn't get a loan to build his new store."

Bernanke and Pelley went to the old neighborhood the Bernankes left years ago. A recent owner couldn't quite make the mortgage, so the economy literally hit home.

"When you first heard that your childhood home had gone into foreclosure, what did you think?" Pelley asked.

"Well, I was sorry to hear it. But, you know, in a way, I wasn't surprised. Dillon has taken, you know, a pretty big hit in the economic downturn. Unemployment rate's about 14 percent. And there have been a good number of foreclosures and plant closings and those things I think about that," Bernanke said.

Numbers were always Bernanke's thing: he taught himself calculus and got an SAT score of 1590 out of 1600. A friend talked him into aiming high for college.

"I came home from school one day and there was a phone call for me. And I picked up the phone. They said, 'This is the Harvard Admissions Department. We'd like to let you know that you're accepted in the freshman class.' And I said, 'Come on, who is this really?' But my parents had their doubts about my leaving and going too far from home," Bernanke recalled.

"No! Wait a minute. Your parents weren't thrilled that you were going to Harvard?" Pelley asked.

"My mother was definitely against it. First of all, she said, you know, 'You don't have the clothes. You won't be able to dress properly for Harvard. And it's a long way from here. How you gonna come home on holidays and so on.' So, my parents ate into their savings to let me go, which I'm always grateful for."

Bernanke helped pay for college working construction and working at "South of the Border" - the future chairman of the Fed wore a poncho and waited tables.

Asked what he learned about work, Bernanke said, "Work is hard, that in order to feed your family and to give your kids opportunities you, it's not an easy thing."

Back in the marble confines of the Federal Reserve, Bernanke told Pelley he understands that many Americans are afraid.

"I've been kicking around the country. I spoke to a woman in Ohio, who took her son out of college, because she got laid off. I spoke to a woman in Nevada, who has an advanced stage of cancer. And she was told by her county hospital that they couldn't treat her because a hole had been blown in the state budget. What do you say to those people?" Pelley asked.

"Well, I got into economics, because I wanted to make things better for the average person. When I see a job loss number, 650,000, like we saw last month, I know that's not just a number. That's 650,000 lives that have been disrupted. Families that have had to move or take children out of school. Houses that may be in danger of foreclosure. I know something about what people are going through," Bernanke said.

And that makes it all the more outrageous when he hears of financial firms handing out perks and bonuses after they've taken bailout money. "The era of this high living, this is over now. And that they need to be responsible and use the money constructively," he said.

"And you would say what to those bankers right now in this interview?" Pelley asked.

"I'd say that their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to have a reasonable sense of humility based on, you know, what's happened in the last 18 months," he replied.

We asked Bernanke what it's been like at the office the last 18 months, with his staff working 80 hour weeks.

"I noticed when we were in your office. You have a couch in there. You [have] been sleeping on that couch?" Pelley asked.

"Once in a while," Bernanke said. "And sometimes, it goes through the weekend. Sometimes it goes overnight."

The Federal Reserve is the life blood of the banking system. Its 12 regional banks are clearing houses for commercial banks.

One of the vaults associated with the Reserve Bank is in New York. Robots carry cash in the vault that's as big as a football field and four stories high. Each pallet, loaded with $100 bills, is worth $64 million. The Fed has 22,000 employees. It clears your checks and your ATM withdrawals. And it provides economic forecasts.

But one of its most important responsibilities is regulating the nation's biggest banks, to be the watchdog.

"You're supposed to keep them out of trouble. So, how did all this happen?" Pelley asked.

"Well, a lot of mistakes got made. No question about it. But, you know, this was a much bigger thing than any single firm or any single individual," Bernanke replied. "Over the last dozen years or so, enormous amounts of savings has flowed into the United States, and some other industrial countries. That savings has come from China and East Asia. It's come from oil producers. And hundreds of billions of dollars, it has come into our financial system. And, you know, that would be great if we took that money and invested it wisely, and got a high return. But instead, our financial system didn't do a good job. We had a regulatory system that was like a sandcastle on the beach. When you had little small waves just lapping up against the sand castle, everything looked good. But when you had a big breaker come in, suddenly the system wasn't strong enough to deal with it."

"Does the Federal Reserve bear any responsibility for missing what was happening to the banks, as it was happening?" Pelley asked.

"Well, like other regulators, we probably could have done more. We've already done a lot of - put a lot of effort into reviewing our practices. And reviewing the bank's practices. We are trying to strengthen our regulation at every point that we can. So, I don't want to deny that we certainly could have done a better job, and others could have done a better job," Bernanke conceded.

Now President Obama and the Congress have a fiscal stimulus plan of nearly $800 billion. There's that separate bailout for financial firms - at least $700 billion. And plans are developing for a way that would take on the bad debt of crippled institutions.

"There was a panic in 1907. So the Fed was created to prevent that from ever happening again. And then we got the Great Depression. And now we have this. How do we prevent this from occurring another time?" Pelley asked.

"Well, tougher regulation of large firms. It includes having a set of laws that allows us to wind down. A large, internationally active firm, without the adverse impacts on the markets that a disorderly bankruptcy would have. It includes possibly having a systemic regulator. A regulator that has some responsibility to look at the system as a whole," Bernanke said.

"Your response has been to do what the Fed didn't do in 1929, and that is pour money into the system. But there's an argument made today that that's not what the problem is. The problem isn't that there's too little money in the system. The problem is there's too much fear in the system. That with these companies being propped up by the government, no one on Wall Street can tell who's solvent and who's not. And therefore, business does not move," Pelley pointed out.

"Well, I absolutely agree that confidence is key," Bernanke said. "People don't know what's happening. And they're afraid. And they're not sure what, you know, whether or not the system is gonna recover. So, how do you get confidence, that's the question. And I think the way to get confidence is to show progress."

Asked if he's seeing any progress, Bernanke said, "I think all of our efforts, so far, have produced results. We're buying about $500 billion in mortgages, in package and securities by the G.S.E.s, Fannie Mae and Freddie Mac. And that seems to have brought down mortgage rates significantly. It allows people to refinance. To get out of high rate mortgages. We are seeing progress in the money market mutual funds, and in the business lending area. And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back."

"Do you see green shoots?" Pelley asked.

"I do. I do see green shoots. And not everywhere, but certainly in some of the markets that we've been functioning in. And we've seen some improvement in the banks, as well," Bernanke said.

Asked what the first signs of recovery will be, Bernanke told Pelley, "Well, I think that one sign would be that a large bank is successful in raising private equity. Right now, all the private money is sitting on the sidelines saying, 'We don't know what these banks are worth. We don't know that they're stable.' And they're not willing to put their money into the banks."

"If you had a message for the American People in this interview, what would it be?" Pelley asked.

"Scott, I'd say three things. I'd say, first of all, that the Federal Reserve is here, and is gonna do everything possible to support this recovery. The second thing I would say is that we have to understand, though, that recovery is not gonna happen until the financial markets and the banks are stabilized. And we do have a plan, we have a program for that. But it's gonna take some patience," Bernanke said.

"But the third and final thing I'd just like to say to the American People is that I have every confidence that this economy will recover, and recover in a strong and sustained way. The American people are among the most productive in the world. We have the best technologies. We have great universities. We have entrepreneurs. I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain the most powerful and dynamic economy in the world."

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Systemic risk defined--Too Big to Fail

Systemic risk is the risk of collapse of an entire system or entire market and not to any one individual entity or component of that system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by inter-linkages and inter-dependencies in a system or market, which could potentially bankrupt or bring down the entire system or market if one player is eliminated, or a cluster of failures occurs at once.[3] It is also sometimes erroneously referred to as "systematic risk".

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Explanation

The easiest way to understand systemic risk is to consider a bank run which has a cascading effect on other banks which are owed money by the first bank in trouble. As depositors sense the ripple effects of default, and liquidity concerns cascade through money markets, a panic can spread through a market, creating many sellers but few buyers. These inter-linkages and the potential "clustering" of bank runs are the issues which policy makers consider when addressing the issue of protecting a system against systemic risk. Governments and market monitoring institutions (such as the SEC, and central banks) often try to put policies and rules in place to safeguard the interests of the market as a whole, as all the trading participants in financial markets are entangled in a web of dependencies arising from their inter-linkages and often policy makers are concerned to protect the resiliency of the system, rather than any one individual in that system. Sometimes "picking winners" and protecting favored individual participants in a system can engender moral hazard in a system and weaken the resilience of the system as a whole.

Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

Consider a portfolio of perfectly hedged investments, we can say that the market risk of this portfolio is nullified. Yet, if there is a downturn in the economy and the market as a whole sinks, the hedges would not be of use. This is the systemic risk to the portfolio.

Insurance is often difficult to obtain against "systemic risks" because of the inability of any counterparty to accept the risk or mitigate against it, because, by definition, there is likely to be no (or very few) solvent counterparties in the event of a systemic crisis. For example it is difficult to obtain insurance for life or property in the event of nuclear war. The essence of systemic risk is therefore the correlation of losses. Because of the inter-dependencies between market participants, an event triggering systemic risk is much more difficult to evaluate than "specific risk". For example, while econometric estimates and expectation proxies in business cycle research led to a considerable improvement in forecasting recessions, good analysis on "systemic risk" protection is often hard to obtain, since inter-dependencies and counterparty risk in financial markets play a crucial role in times of systemic stress, and the interaction between interdependent market players is extremely difficult (or impossible) to model accurately. If one bank goes bankrupt and sells all its assets, the drop in asset prices may induce liquidity problems of other banks, leading to a general banking panic.

One concern is the potential fragility of liquidity in some highly leveraged financial markets. If the participants are trading at levels far above their capital bases, then the failure of one participant to settle trades may deprive others of liquidity, and through a domino effect expose the whole market to systemic risk.

Systemic risk can also be defined as the likelihood and degree of negative consequences to the larger body. With respect to federal financial regulation, the systemic risk of a financial institution is the likelihood and the degree that the institution's activities will negatively affect the larger economy such that unusual and extreme federal intervention would be required to ameliorate the effects.

Measurement of Systemic Risk

Too Big To Fail: The traditional analysis for assessing the risk of required government intervention is the "Too Big to Fail" Test (TBTF). TBTF can be measured in terms of an institution's size relative to the national and international marketplace, market share concentration (using the Herfindahl-Hirschman Index for example), and competitive barriers to entry or how easily a product can be substituted. While there are large companies in most financial marketplace segments, the national insurance marketplace is spread among thousands of companies, and the barriers to entry in a business where capital is the primary input are relatively minor. The policies of one homeowners insurer can be realtively easily substituted for another or picked up by a state residual market provider, with limits on the underwriting fluidity primarily stemming from state-by-state regulatory impediments, such as limits on pricing and capital mobility. There are arguably either no or extremely few insurers that are TBTF in the U.S. marketplace.

Too Interconnected to Fail: A more useful systemic risk measure than a traditional TBTF test is a "Too Interconnected to Fail" (TICTF) assessment. An intuitive TICTF analysis has been at the heart of most recent federal financial emergency relief decisions. TICTF is a measure of the likelihood and amount of medium-term net negative impact to the larger economy of an institution's failure to be able to conduct its ongoing business. The impact is measured not just on the institution's products and activities, but also the economic multiplier of all other commercial activities dependent specifically on that institution. It is also dependent on how correlated an instituion's business is with other systemic risk.

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Asociate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Whose your Daddy AIG?

It is now clear that AIG had to be bailed out. The alternative was a meltdown of the world financial system. I still remember Hank Greenberg, with hat in hand on CNBC, telling America that AIG has plenty of assets and just needed some help from the U.S. government---taxpayers (that was the first $85 Billion) . I also remember writing that there was zero chance that AIG would make it. I still believe that to be true.

The government is going to need to keep AIG going for about 20 years before they can dig themselves out of the hole they put themselves in by creating a mountain--a trillion dollars or more--of phony baloney paper. We are learning every day how toxic so called credit derivatives swaps are, and how worthless they are. Nobody can put a price on this paper. On the other hand, it did help enrich management of AIG by creating lots of fee income that turned into bonuses. The underlying assets--little did they care.

So here comes AIG hat in hand for more of the taxpayer's hard earned dollars. This is really the Donald Trump strategy--get your partners in so deep they have no choice but to give you more money. So far they are into our pockets for $150 billion.


It is time for a realistic view of this problem. We--the taxpayers--need to hire some sharp investment bankers to get in there and make the best deal possible for the American public. This plan should include a longer term plan to dismantle AIG and erase it from the face of the earth.

Throwing good money after bad is not going to work and the next thing you know we--the taxpayers--will be broke. It is time to ask--Whose your daddy?

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This is a very good explanation of the situation as it now exists. Follow the link for more.

AIG Seeks to Ease Its Bailout Terms

American International Group Inc. is seeking an overhaul of its $150 billion government bailout package that would substantially reduce the insurer's financial burden, while further exposing U.S. taxpayers to its fortunes, people familiar with the matter say.

Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG's lucrative Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to ...

Restoring Financial Stability: How to Repair a Failed System (Wiley Finance)

Financial Meltdown--Where there is Smoke, there is Fire

At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the interconnectivity of financial institutions in a geographic proximity....His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans. This was a very unpopular stance that cost him his job....It also was the catalyst of a stock market crash in 1987....I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. I find myself thinking right now—“Cash is King”.

Financial Meltdown--Where there is Smoke, there is Fire

Back in the 1980s I learned an important lesson. At the time, I was with Bear Stearns and working in their Dallas, Texas office. The head of credit came to Texas to visit the state’s major banks and Savings and Loans to discuss their financial statements. Specifically he was trying to get a handle on their financial viability. There was a growing concern about the quality of credit and soundness of financial institutions in the southwest and California. The head of credit spent a couple of days in Dallas and Houston talking to the CFOs of these banks. Late in day, at the end of the trip, I saw him sitting alone in the office and asked him what he was doing. He informed me he was done but was not scheduled to fly out until the next morning. I saw this as an opportunity to “pick” his brain and learn something. So, I invited him out to dinner.

At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the inter connectivity of financial institution is a geographic proximity. His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans. This was a very unpopular stance that cost him his job. At the end of the day he was right. Both of the major banks in Dallas failed (Republic and First Interstate) and all of the major S and L’s in Texas failed (Sunbelt and Bright Bank to name two). This resulted in the formation of the Resolution Trust Corporation a government agency set up to dispose of the massive amount of defaulted loans owned by these financial institutions. It also was the catalyst of a stock market crash in 1987.

For years I have been telling my friends that the derivatives and swaps markets would turn out to be the equivalent of the savings and loan fiasco but on a scale that could never be imagined. Let me ask you, do you know anyone that predicted Bear Stearns, Lehman Brothers and AIG would go up in smoke? That Merrill Lynch would be offered at a fire sale? Have you heard prior discussions about the inter connectivity of all these financial institutions? Are they within a 150 mile radius?

AIG, the next to go, is a good example of the direness of the current situation. AIG has been racking up enormous profits for a very long time. Just last week they were considered to be solvent. They are loaded with cash. They are claiming $1,000,000,000,000 in assets (Trillion). They operate world wide. Now if you ask AIG they will tell you their problem is not a solvency issue it’s a liquidity issue. It seems that the financial community is no longer buying this argument and no one is willing to stand up and throw money at the problem. AIG does not have the necessary assets to collateralize the $75 billion in loans it needs right now to keep operating. If they go down someone will be on the hook for the insurance side of the business. I bet you thought as an insurance company there were being regulated. Partially true but this does not include the part of the business that is all wrapped up in the credit default swaps market and other derivatives designed to leverage the balance sheet and create “monster” profits. It appears the Fed and government regulators have finally decided that bailouts aren’t working and decided to say no to Lehman and AIG. Lehman is bankrupt and it appears that AIG will declare bankruptcy soon. The too big fail rule is no longer in effect.

It would be foolish to believe that once AIG goes over the cliff it will bring an end to the financial crisis we are seeing today. You should be thinking of the inter connectivity of AIG and all the counterparties they are doing business with AIG worldwide. Companies doing business with them will get wounded, maybe mortally wounded. What looked like a US problem is now a global problem. This will spill into financial markets world wide.

It appears it is finally being recognized that this is not smoke, it’s a FIRE. It appears that “too big to fail” is no longer a workable strategy to fix the problem. It appears the reality of the credit swaps derivatives market is finally being recognized. It’s likely that much of this paper is worthless or only worth cents on the dollar. This financial crisis is not likely to go away over night. There is more to come before all this “paper” can get unwound or find a home. In the interim there is an enormous risk in the stock and other financial markets.

The Fed will address this issue by adding massive liquidity to the markets. The world’s central banks will do the same. It is the right thing to do. But, it is a short term fix that is like prescribing an aspirin for a major infection. It might lower your fever but it won’t cure your illness.

In closing, I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. But, right now I find myself thinking—“Cash is King”.