# Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch... **URL:** \ **Category:** Great Debates\ **Created:** [September 15, 2008, 2:29am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650 "2008-09-15T02:29:45Z")\ **Posts on this page:** 20\ **Page:** 6
**Author:** ![vison](https://avatars.discourse-cdn.com/v4/letter/v/e47774/32.png) [@vison](https://boards.straightdope.com/u/vison)\ **Post date:** [September 17, 2008, 4:06am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/101 "2008-09-17T04:06:00Z")
> [@Squink](#): > > People should hang for this. I agree. The dereliction of fiduciary duty is beyond belief, at every level. ---
**Author:** ![Cat\_Whisperer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cat_whisperer/32/4839_2.png) [@Cat\_Whisperer](https://boards.straightdope.com/u/Cat_Whisperer)\ **Post date:** [September 17, 2008, 4:43am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/102 "2008-09-17T04:43:07Z")
> [@anu-la1979](#): > > How do you figure every one of “us” is going to lose our jobs and homes? That was hyperbole for effect. Of course you won’t all lose your homes - just a whole bunch of you. My economist friend’s take on the so-called bailout of AIG (the company he works at): > [@](#): > > I am really pissed at CNN for calling this a ‘bailout’. This is not a free ride for AIG. We just forfeited 99% of the $1050B firm equity for a short $85B loan and long time employees just lost nearly their entire retirement savings… that’s not exactly a sweet deal. Seeing as the government threw us into this mess with their ridiculous overregulation and applications of mark-to-market accounting standards that make absolutely zero sense (which I will reserve for another post), I think that they could have given us something better than a low-ball deal to help us out of it. On the plus, I don’t have to clean out my desk tomorrow. So, yay? ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [September 17, 2008, 5:00am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/103 "2008-09-17T05:00:20Z")
> [@IdahoMauleMan](#): > > I don’t have the balance sheet in front of me, but equity is assets minus liabilities. I have no idea what their liabilities are off the top of my head, but IIRC AIG’s market cap was in the $200 billion range before the market started to head south. That’s not the same as book equity, of course, but it’s probably the same order of magnitude. > > 80% for $85 billion implies a market cap of a bit north of $100 billion. That sounds about right for a going concern of AIG’s size. Let’s hope the concern is actually going. Forward, that is. Well of course part of the problem is that no one actually knows the full extent of the liabilities, in particular no one knows how bad its Financial Products division losses are going to be. As I hear it they got into insuring against financial product losses without really having any good model for managing the risk and it has blown up in their face such that they have a significant cash flow problem. And the Feds are acting the part of a payday loan lender. Or maybe even someone a little shadier. But the other thing, by all reports, is that the rest of their business is pretty damn rock solid. The loan, plus loanshark’s interest, will be paid off (by some analyses within a decade), and, if I understand it right (and I still think I must be misunderstanding something) the Feds still own a majority stake even after the loan is paid down. That can’t be right. But it seems to be. That’s pretty damn good terms but when AIG’s only choice is dealing with the Fed loanshark or death … well. And yeah, probably even Buffet couldn’t get that much cash up out of pocket change. ---
**Author:** ![anu-la1979](https://avatars.discourse-cdn.com/v4/letter/a/47e85d/32.png) [@anu-la1979](https://boards.straightdope.com/u/anu-la1979)\ **Post date:** [September 17, 2008, 5:14am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/104 "2008-09-17T05:14:16Z")
Well, I agree with your general statement that the top brass at these companies made very bad decisions **featherlou** but I think at this point it’s the hysteria of OMGweareallgoingtoloseourhousesetc.etc. that’s going to take banks under. There were people in this thread who couldn’t even distinguish between a commercial and an investment bank. Merrill was struggling with losses from their ex-CEO betting on mortgage backed securities, but ultimately they sold themselves because they knew they were going to come in to this general attitude Monday, not because their balance sheets resembled Lehman’s. Besides, I will say that there’s an unseemly “nyah nyah” tone in your posts. You do realise that the market recovered after the dot com bust, right? ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [September 17, 2008, 5:27am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/105 "2008-09-17T05:27:44Z")
[Okay.](http://online.wsj.com/article/SB122156561931242905.html) The 80% “stake” is apparently “equity participation notes” (EPN) and the terms of that are not publicly defined that I can find. So AIG is committed to paying off the loan plus interest, and if the stock value goes up must pay the Feds some portion of the increase value (could be 100% but could be less depending on the EPN) as well. So from the Fed POV. If they fold then the Fed sells off the assets and probably loses little, if anything. (Worst case). If they survive but the stock does not come back to its usual baseline then the Feds get the loan back plus the generous rate of return (currently over 11%). If they survive and come back to their usual baseline stock value - about twice its current value - then the Feds both get that loan and the interest and make perhaps $85 billion in the deal additional as well. (Depends on the EPN terms.) And they don’t have to pay taxes on it! And it keeps the world economy from total meltdown in the deal. For kicks. As a taxpayer I’m liking this move. ---
**Author:** ![First\_Amongst\_Daves](https://avatars.discourse-cdn.com/v4/letter/f/4491bb/32.png) [@First\_Amongst\_Daves](https://boards.straightdope.com/u/First_Amongst_Daves)\ **Post date:** [September 17, 2008, 11:22am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/106 "2008-09-17T11:22:08Z")
Colour me dry, but isn’t this the downside of commercial risk? You trust people with your money, and if they cock up, isn’t that the risk you run balanced against the possible returns? And while the AIG deal isn’t a bail-out, aren’t the Freddie/Fannie bail outs nationalisation of two big financial institutions? What happened to the free market? Banks will enter into stupid risks if they know the Fed will bail them out. Why should taxpayers be the safety net for the trapeze acts of the un-coordinated? ---
**Author:** ![tagos](https://avatars.discourse-cdn.com/v4/letter/t/bbe5ce/32.png) [@tagos](https://boards.straightdope.com/u/tagos)\ **Post date:** [September 17, 2008, 11:27am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/107 "2008-09-17T11:27:35Z")
> [@First\_Amongst\_Daves](#): > > Banks will enter into stupid risks if they know the Fed will bail them out. Why should taxpayers be the safety net for the trapeze acts of the un-coordinated? The people who run banks will also enter into stupid risks and over-estimate the value of derivatives if it gives them giant, non-refundable bonuses too. No-one seems to have any incentive to be otherwise than stupid and that’s why we need more not less regulation. I don’t see any evidence that risks were entered into because the bankers thought it didn’t matter as they would be bailed out. That’s just the usual free market pornsters jerking off excuses. ---
**Author:** ![DragonAsh](https://avatars.discourse-cdn.com/v4/letter/d/db5fbb/32.png) [@DragonAsh](https://boards.straightdope.com/u/DragonAsh)\ **Post date:** [September 17, 2008, 11:53am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/108 "2008-09-17T11:53:15Z")
> [@spazattak](#): > > What does our productivity have to do with economic fundamentals? GDP? Sure. Productivity has nothing to do with the consumption of goods or services though. Wages are stagnant or declining, unemployment is rising (though agreed, isn’t ‘high’ yet).. inflation is rising.. the only ‘fundamental’ that says we’re not in trouble is GDP, and even that just says ‘we’re not totally screwed…yet’. > If inflation becomes a bigger problem, don’t count on those low rates. I generally agree with your conclusions about a slow-down. I don’t understand how you can say ‘fundamentals’ are strong in the same breath. We wouldn’t be heading towards a slow-down if the fundamentals were strong. It’s oxymoronic. You are falling into the same trap that the media at large has - ‘inflation is rising! Unemployment is up! We’re doomed!’ Yes, it feels like a recession, and no one is saying we’re not heading for tougher times ahead. But - I’m not a McCain follower - the essence of his message (our economy’s fundamentals are still sound) was essentially correct. Note, for example, that inflation is easing (oil and other commodities now down 30%+ since the June highs). Energy prices are already coming down, and will show up in CPI data in the next couple of months. What we have here is a -housing market- problem, and is being manifested in the financial sector, where too many financial institutions were overly exposed with too much leverage. Yes, it is going to impact credit markets everywhere, from credit cards to student loans, etc. The recent slide in commodity prices notwithstanding, we are probably facing a prolonged uptrend in food/energy prices, due to rising demand from emerging markets. But the US fundamentals are fine - as evidence, I would repeat that we have yet to see even one quarter of negative growth. Contrast that with Japan, where 2Q GDP was down 3%. ---
**Author:** ![Koxinga](https://avatars.discourse-cdn.com/v4/letter/k/4af34b/32.png) [@Koxinga](https://boards.straightdope.com/u/Koxinga)\ **Post date:** [September 17, 2008, 12:22pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/109 "2008-09-17T12:22:38Z")
> [@DragonAsh](#): > > What we have here is a -housing market- problem, and is being manifested in the financial sector, where too many financial institutions were overly exposed with too much leverage. Yes, it is going to impact credit markets everywhere, from credit cards to student loans, etc. The recent slide in commodity prices notwithstanding, we are probably facing a prolonged uptrend in food/energy prices, due to rising demand from emerging markets. But the US fundamentals are fine - as evidence, I would repeat that we have yet to see even one quarter of negative growth. Contrast that with Japan, where 2Q GDP was down 3%. Remember that GDP is made up of four things: (1) consumer spending, (2) government expenditures, (3) private investment and (4) net imports/exports. You don’t think a credit crunch will have a big impact on all four? (1) The average consumer lives on his or her now hard-to-obtain credit cards, (2) the government is going to be fiscally constrained by all the new obligations it’s taking on (unless it majorly ramps up taxes, in which case revisit 1), (3) private investment isn’t gonna be happyland with no business lending in the offing, and (4) well OK, we might sell more abroad and buy less crap from abroad, putting a small dent in the trade deficit. Good luck. Furthermore, doesn’t the flip side of a credit crunch come in the form of a liquidity crisis? The business boneyard is littered with defunct companies that were “fundamentally sound” but couldn’t bridge their immediate obligations with sufficient liquidity–in fact, that was more or less the case with AIG, I believe. So who’s gonna bail _us_ out? ---
**Author:** ![Koxinga](https://avatars.discourse-cdn.com/v4/letter/k/4af34b/32.png) [@Koxinga](https://boards.straightdope.com/u/Koxinga)\ **Post date:** [September 17, 2008, 12:26pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/110 "2008-09-17T12:26:19Z")
> [@First\_Amongst\_Daves](#): > > And while the AIG deal isn’t a bail-out, aren’t the Freddie/Fannie bail outs nationalisation of two big financial institutions? What happened to the free market? > > Banks will enter into stupid risks if they know the Fed will bail them out. Why should taxpayers be the safety net for the trapeze acts of the un-coordinated? A question asked 30 to 60 years too late. As their predecessors failed to nip that [moral hazard](http://en.wikipedia.org/wiki/Moral_hazard) in the bud, Paulson and Bernanke are being forced to create moral hazard out the wazoo today and in the foreseeable future. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [September 17, 2008, 1:34pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/111 "2008-09-17T13:34:16Z")
> [@First\_Amongst\_Daves](#): > > And while the AIG deal isn’t a bail-out, aren’t the Freddie/Fannie bail outs nationalisation of two big financial institutions? What happened to the free market? Why wouldn’t you call the AIG deal a bailout? They got an $85B mezzanine loan where they gave up an 80% equity stake in the company. They needed the money or else they were going to file bankruptcy. I’d definitely call that a bailout. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [September 17, 2008, 1:52pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/112 "2008-09-17T13:52:29Z")
> [@Koxinga](#): > > Not to dredge up not-so-ancient board history, but I think this [earlier SDMB thread](http://boardstest.straightdope.com/sdmb/showthread.php?t=478966) provides an interesting comparison of attitudes. > > A few choice Doper quotes: > > None of these folks have appeared in this thread so far. Wonder what they’ll have to say now? Well, it won’t be so much that our creditors will try to ‘collect’ in the classic sense of the term. Nobody is going to come over here and demand US assets as collateral or anything like that. But as we roll over existing obligations and need to borrow new money, the rubber will hit the road. Investors will demand higher interest rates if they are less interested in our debt than they once were. Or they might not buy it at all. In a roundabout way, that’s what happened when Merrill and Lehman couldn’t scare up any more foreign capital during the last week. And, if your central bank starts to lose it’s credibility as an inflation-fighter, investors will also start to factor in to their decision that you might just print money to pay your debts, devaluing the paper that they just bought. That can drive the rates that they demand even higher or scare them off altogether. Do some historical searches on bonds issued by Mexico (before the Brady bonds), Venezuela and the like if you want to see what that looks like. So that’s how they will ‘collect’. There will always be (won’t there be?) Treasury paper sold to foreigners. It will be a question of how much, what the interest rates are, how it has an impact on inflation and how much servicing our debt comes to dominate our national budget. Ohhhh, for the Gipper. Bring back the Gipper. ---
**Author:** ![First\_Amongst\_Daves](https://avatars.discourse-cdn.com/v4/letter/f/4491bb/32.png) [@First\_Amongst\_Daves](https://boards.straightdope.com/u/First_Amongst_Daves)\ **Post date:** [September 17, 2008, 2:21pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/113 "2008-09-17T14:21:30Z")
> [@LonghornDave](#): > > Why wouldn’t you call the AIG deal a bailout? They got an $85B mezzanine loan where they gave up an 80% equity stake in the company. They needed the money or else they were going to file bankruptcy. I’d definitely call that a bailout. See the earlier post above, quoting an AIG internal economist, describng it as less of a bail-out and more of a bargain. His brief take on events sounded convincing to me. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 17, 2008, 3:16pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/114 "2008-09-17T15:16:21Z")
> [@erislover](#): > > It is an incentive to take risks. Risks are, well, risky, and don’t always pay off, but it is the only way to get stellar returns on investment capital. If your CEO has to worry about where his paycheck will come from tomorrow, he might not be the most objective person to deal with directing a company in ways that spurn growth an innovation. Whether this is what you want your CEO doing probably depends a lot on the company, and what dollar amount correlates well with healthy risk-taking is probably not something you just google to find out, but I think overall the idea makes a kind of sense. So taking risks with other peoples money is a good idea.You want a CEO who gambles with the future of the corporation for short term profits. Hank Greenberg who ran AIG for many years and has been out of it a few years ,was on Rose last night. He says there is a lot of value in AIG. But ,the guys running it now did not hedge their bets. They made moves that actually jeopardized the company to keep up with the wild wall street investors. The stock holders would have been disappointed if they did not take risks to get on the home loan gravy train. But they went way to far. It was bad management. They made multi-million bonuses and are set for life. The stock holders and employees .not so lucky. ---
**Author:** ![LonghornDave](https://avatars.discourse-cdn.com/v4/letter/l/a87d85/32.png) [@LonghornDave](https://boards.straightdope.com/u/LonghornDave)\ **Post date:** [September 17, 2008, 3:44pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/115 "2008-09-17T15:44:14Z")
> [@First\_Amongst\_Daves](#): > > See the earlier post above, quoting an AIG internal economist, describng it as less of a bail-out and more of a bargain. His brief take on events sounded convincing to me. It may end up being a good deal for the government, maybe even a bargain, but that doesn’t make it any less of a bailout. The federal government was literaly the lender of last resort. Their actions bailed the company out by providing them with enough liquidity to stave off bankruptcy. This seems like more of a bailout than Bear Stearns, where the government provided a guaranty of certain of their investments. It also can be argued to be less of a bailout than Fannie Mae or Freddie Mac as the government already had an implied guaranty that they would step in dating back to the transition to government sponsored private corporations in 1968. This seems to be the most clear cut bailout of them all. ---
**Author:** ![First\_Amongst\_Daves](https://avatars.discourse-cdn.com/v4/letter/f/4491bb/32.png) [@First\_Amongst\_Daves](https://boards.straightdope.com/u/First_Amongst_Daves)\ **Post date:** [September 17, 2008, 3:54pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/116 "2008-09-17T15:54:40Z")
I’ve no argument with that. > [@Koxinga](#): > > A question asked 30 to 60 years too late. As their predecessors failed to nip that [moral hazard](http://en.wikipedia.org/wiki/Moral_hazard) in the bud, Paulson and Bernanke are being forced to create moral hazard out the wazoo today and in the foreseeable future. So when do the car companies get their bail-out? And the airlines? How about the leftover dot com companies? :rolleyes: ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [September 17, 2008, 4:13pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/117 "2008-09-17T16:13:16Z")
> [@First\_Amongst\_Daves](#): > > I’ve no argument with that. > > So when do the car companies get their bail-out? > > And the airlines? How about the leftover dot com companies? > > :rolleyes: Car companies have gotten [bailouts.]([http://www.time.com/time/magazine/article/0,9171,947356,00.html\](http://www.time.com/time/magazine/article/0,9171,947356,00.html%5C)) Old old news. The precedence is set and the way was led back then almost 30 years ago. Now the issue for the car companies is not if they will be bailed out, but if the Feds will help before a bailout is needed. Will they make low cost loans available to help fund the retooling needed to get a leg up on newer technologies needed to keep jobs mostly here? Do/should other pro-social ends (less energy dependence; decreased carbon emissions) influence the decision? And, yeah, [airlines](http://www.nytimes.com/2004/09/15/business/15air.html) already had their time in the trough too. Dotcoms - never were big enough to matter enough.. ---
**Author:** ![Koxinga](https://avatars.discourse-cdn.com/v4/letter/k/4af34b/32.png) [@Koxinga](https://boards.straightdope.com/u/Koxinga)\ **Post date:** [September 17, 2008, 4:15pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/118 "2008-09-17T16:15:15Z")
> [@First\_Amongst\_Daves](#): > > I’ve no argument with that. > > So when do the car companies get their bail-out? > > And the airlines? How about the leftover dot com companies? > > :rolleyes: Fannie and Freddie were created with implicit guarantees that the government would back their paper. Cars, airlines, dot coms weren’t. Of course, AIG and Bear weren’t either, but they were judged to be too critical to the financial system to be allowed to fail. And you’re forgetting [Chrysler](http://en.wikipedia.org/wiki/Chrysler#Government_loan_guarantees). ---
**Author:** ![Cat\_Whisperer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cat_whisperer/32/4839_2.png) [@Cat\_Whisperer](https://boards.straightdope.com/u/Cat_Whisperer)\ **Post date:** [September 17, 2008, 4:30pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/119 "2008-09-17T16:30:02Z")
> [@anu-la1979](#): > > Well, I agree with your general statement that the top brass at these companies made very bad decisions **featherlou** but I think at this point it’s the hysteria of OMGweareallgoingtoloseourhousesetc.etc. that’s going to take banks under. There were people in this thread who couldn’t even distinguish between a commercial and an investment bank. \ There’s a fine line between people protecting themselves and hysterical over-reacting, I’ll give you that. > [@](#): > > Besides, I will say that there’s an unseemly “nyah nyah” tone in your posts. You do realise that the market recovered after the dot com bust, right? I don’t agree with that; I am getting more and more sympathetic to the mess the US is in by the day. From my perspective as a Canadian, I’ve had my country poo-pooed by Americans regularly (albeit not usually on this board) for being more cautious and “socialist.” I think that is the attitude you’re seeing - not that I’m happy for the US problems, just that I’m feeling a little vindicated about my country’s traditionally more conservative, controlled approaches. As for recovery any time soon, these are very interesting times we’re living in. ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [September 17, 2008, 4:45pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/120 "2008-09-17T16:45:30Z")
> [@Koxinga](#): > > Remember that GDP is made up of four things: (1) consumer spending, (2) government expenditures, (3) private investment and (4) net imports/exports. You don’t think a credit crunch will have a big impact on all four? Yes, it probably will, but how has this affected the GDP now? We’ve seen growth. When there are two quarters of negative growth, let me know, then I’ll call it a recession. Which again, as **IdahoMuleMan** touched upon, is not a bad thing when the Fed adjust the interests rates to attract capital. The Fed can increase the money supply a couple of ways, but for simple discussion, let’s just call it either 1) lowering the interest rate; 2) printing out more cash; or, 3) selling more t-bonds/securities/whathaveyou. 1&2 will definitely lead to higher inflation. How much will determine how bad things get. People who have a lot of actual cash saved up (not adjusted for inflation), and people don’t have an inflation index adjustment to their salaries are going to be hurt now. However, it will return liquidity to the markets, though some economists will still see the “growth” as a negative thing (i.e. probably because there is no value associated with it). IMO, this is rolling the dice. A good bet? I’m not sure, I’m inclined to say no, but I’m a fiscal conservative, so that’s my bias. I’d rather see 3, and raise interest rates. This will definitely slow US growth, though, but it will keep inflation capped and will cause more people to save because the rate will be so high. This might cause more companies to raise capital through stock, but preferred stock is the textbook way to go anyway, and it will certainly harm those companies that try to raise capital through bonds (because payout will be high with the high interest rate). I like this method because it forces people to save and make rational choices, all else being equal. > [@](#): > > Furthermore, doesn’t the flip side of a credit crunch come in the form of a liquidity crisis? The business boneyard is littered with defunct companies that were “fundamentally sound” but couldn’t bridge their immediate obligations with sufficient liquidity–in fact, that was more or less the case with AIG, I believe. > > So who’s gonna bail _us_ out? Again, it’s probably going to be more government securities. Total debt is still a minor part of GDP. As I have stated before Japan’s debt is like what 140, 150% of GDP. They’re still around. One of my friends is consulting to AIG right now, and he says that they still have a ton of cash in the banks, so there is value there (as others have stated – hence the “bail out,” and otherwise a good bet). Let the market sort out the bones of AIG. [Previous page](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650.md?page=5) [Next page](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650.md?page=7)