"Now Comes Talk of a Bailout from the Bailout"

This story just gets better and better. In a panic, we gave Treasury $700 billion and broad discretion to use it to keep the financial services industry from crumbling. We thought that money would be spent on the financial services industry, buying up toxic assets and other securities deemed necessary to keep ailing banks in the black. At present, no toxic assets have been purchased, but we have bought $172 billion in equity.

Amusingly, Democrats are now arguing that the aiding the automobile industry is essential to that purpose.

House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid sent a letter to Paulson today saying the rescue bill gives him "broad discretion to purchase, or make commitments to purchase, financial instruments you determine necessary to restore financial-market stability."

Pelosi was among the lawmakers who met two days ago with the chief executives of General Motors Corp., Ford Motor Co. and Chrysler LLC. The three companies are seeking $50 billion in federal loans to help them weather the worst auto market in 25 years, according to a person familiar with the matter.

The letter increases pressure on the administration of George W. Bush to take action as he prepares to hand power to president-elect Barack Obama on Jan. 20. Obama said yesterday that policy options to help the industry will be a "high priority" for his transition team.

"A healthy automobile manufacturing sector is essential to the restoration of financial market stability, the overall health of our economy, and the livelihood of the automobile sector's workforce," Pelosi and Reid said in their letter.

Every lobbyist in Washington just sent Pelosi, Reid, and Obama briefs on how "essential" their particular clients are for market stability. Plenty of sectors are experiencing rough times this year; all could make colorable claims to being "too big to let fail." Whoever is owed the most favors and whoever cries the loudest will get the prize: your money.

As if shady government spending weren't enough, this spending will be spent on creeping socialism. We were asked to put up with partial government ownership of banks because (the argument went) their survival was simply too important to long-term capitalism. The socialist policies would be a temporary situation (allegedly). Now Pelosi and Reid are suggesting the government purchase equity shares in American automakers...and as with the bank purchases, the auto equity comes with strings attached.

Government ownership. Government control. That sounds familiar and vaguely alarming, for some reason.

In Related News: AIG is "negotiating" for better terms on its bailout. You will recall that the taxpayers gave AIG an $85 billion loan in September. AIG now says the repayment terms of that loan are too harsh and that it won't be able to pay.

But former AIG chairman Maurice R. "Hank" Greenberg, a major shareholder, made the case for federal forbearance in an interview yesterday, saying the costs associated with the $85 billion loan pose a potentially crushing burden for the company.

"It's clear that the original terms as the government negotiated with AIG . . . were so draconian that it would be impossible for the taxpayers to be repaid," Greenberg said.

To make payments on the $85 billion credit line, including charges he estimated at $22 billion over two years, AIG would be forced to sell pieces of itself at a fraction of their value, Greenberg said. AIG has been trying to sell assets but has not announced any transactions yet. Market conditions have compounded the challenge, making it harder for prospective buyers to finance deals.

One industry source familiar with the negotiations framed the matter as a question of fairness, too, noting that since the AIG rescue was announced, the government has made funds available to banks on more favorable terms.

This is a shakedown. The taxpayers already own 80% of AIG according to the terms of the loan. We own the company; it has nothing left with which to negotiate except its own survival, which we are now unfortunately very invested in. This is the consequence of acting as if we will do anything to prevent a company from naturally failing. We were believed.

Brace yourselves; AIG will release its second quarter report on Monday. Resist the urge to panic when it does.

posted by Gabriel Malor at 10:50 PM

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