2008 Foreign BailOut

Can Can

We are living in an interesting time. There is much to learn. Just our economy alone is enough to keep one occupied for weeks at a time. Since you are obviously in need of something to do, I will educate you further about the bailouts that have been happening recently. I know youre probably sick and tired of hearing about it. In fact, if youre that tired of it, than by all means trash this paper right now. Go onI understand Still here, I see. You have an honest drive to learn (That, or youre a professor whos being forced to read this.). For your enthusiasm, I will give you a bit of a reward. Its about the bailouts. Instead of ranting on and on about something you have no doubt heard and read about countless times before, I will go over something that not as many have studied. I will spare you most of the general details of the bailouts, since Im sure you already know those. (If you do not, shame on you.) Here, I will answer two questions for you. First: How much of the bailout funds went to foreign banks and other investors? Second: Did any foreign governments bail out banks and investors which had lost money from the collapse of American house prices? To be clear, when I say bailouts I mean all of the money that has been given out by the government with the intention of economic stimulus, which so far has included countless programs and packages (e.g. TARP, etc.) After reading this paper you should have an upper hand above everyone else. (If you are a professor, on the other hand, please try to enjoy reading this.). The first question is pretty easy. U.S. Federal Reserve System has been injecting hundreds of billions of dollars into foreign government treasuries mostly by swapping. At

times the Fed has donated money to foreign banks directly (e.g. August 2007: $131 billion to the European Central Bank) More often than not, in exchange for U.S. dollars the Fed has received foreign currency of equivalent value by way of swaps. To protect the Fed from losses due to currency fluctuation, the deals include a provision that when the moneys are swapped back, the transaction (listed on its balance sheet as "central bank liquidity swaps") will be done at the same exchange rate as the initial transaction. This exchange in the range of between $100 to almost $400 billion at a given date should increase liquidity in those countries, which will in turn, basically, increase the countries ability to pay its bills as they come due. This has also led many (mostly news correspondents) to comment on them increasingly acting as the world's central bank. Although the U.S. government does some form of this quite often, it is especially important who gets money with the economy being what it is. The Fed has established relationships with some major banks, such as the European Central Bank and the Bank of Japan, but also with central banks overseeing smaller, more volatile economies, such as the Banco Central do Brasil. To answer the question further, let me tell you a story. One of the countless happenings during the start of the bailout period was one about the American International Group, Inc. (AIG). They had received just over $100 billion worth of bailout funds from the government. There eventually came a point when probably because of pressure from the Obama administration decided to come clean about where most of the bailout money was going. In a press release on March 15, 2009, the struggling insurer detailed which counterparties had gotten a part of the bailout funds. As it turns out, about $44 billion went to counterparties

headquartered in the U.S. such as Goldman Sachs and states with Hawaii and California among them. Much to the dismay of several people, the majority of the funds $58 billion went to banks headquartered outside the U.S. The big winners were French and German banks, which pulled in $19 billion and $17 billion respectively. To put these numbers in perspective, the U.S. fiscal stimulus bill passed in February 2009 provided only $27.5 billion for highway and bridge construction. I have attached a detailed summary at the end of this paper to help simplify the press release, giving the amounts of money received by each entity. The press release itself is also included after that. Please bear in mind as you go over them that the information not only applies to AIG alone, but also that this info was made public by force from the administration. There is no telling what the other companies have been doing with the money they received from the bailout, which totaled over 12 trillion dollars. Every other entity that received money may some day be forced to do so as well. For the time being, however, no company will willingly tell you how its bailout money is being used. To answer the second topic, first I would like to share a few points, if I may. First, when regarding banks and investors which had lost money from the collapse of American house prices, I assume this mostly refers to those in the United States. The U.S. economy is not just huge, but globally integrated. When our economy took a plunge, it seemed as if everything around the world was affected by our failures. The most obvious cases were in

terms of people/firms in the U.S. borrowing, investing, etc. All of these went down. Those who needed our business the most had to get by without our help. Because one could say that everyone was in some way affected by our recession, any help given to a nation (e.g. third world country) by another (e.g. likely the U.S. or the E.U.) can technically count as banks and investors which had lost money from the collapse of American house prices. I realize that this is a bit of a long shot and cannot be proven easily, especially since there were other reasons behind the downfall of certain world economies (remember Iceland?). Therefore, for the sake of argument, I will assume the question refers to foreign governments bailing out U.S. banks and investors. One could say that the U.S. Treasury and Fed had in effect been bailing out the rest of the world to a massive degree. I personally believe that to be true. If you are at all worried about this, calm down. Recall a few facts: Back in 2007 the U.S. gross domestic product was $14 trillion, compared to the world GDP of $54 trillion. About 26 percent of the worlds economic activity takes place in the United States. The American economy is so huge that it is larger than the economies of the next four countries combined: Japan, Germany, China, and the United Kingdom. With that, we find the answer to the second question. Despite how nice and convenient it would be for us, it is unreasonable to believe that any country or group of countries like the E.U., even with their GDP of $1 trillion more than ours in 2007 to bail out any of these banks or investors. Our economy in its whole is simply too big to be helped by all of those around us. Although it is certainly possible for other nations to bail us out (at great inconvenience to

them, mind you) it is not at all likely for foreign governments to bail out banks and investors which had lost money from the collapse of American house prices. Congratulations! You have made it to the end, meaning you are either much smarter than you were before or you are almost finished grading this. Either way, you are now much more qualified to talk about the subject than you were before. In fact, now would be a good time to do so. Let others know about this; explain the world around them. At least make them slightly less ignorant. Its the least they can do.

References:
Grin, Ryan. U.S. Injecting Billions Into Foreign Central Banks. Huffington Post (2008)

Web.14 Mar 2010. <http://www.huffingtonpost.com/2009/03/17/us-injecting-billionsint_n_175454.html>. Mandel, Michael. German and French banks got $36 billion from AIG Bailout. Business

Week: Economics Unbound (2009) Web. 14 Mar 2010. <http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren .html>. Watson, Teri. AIG Discloses Counterparties to CDS, GIA and Securities Lending

Transactions. AIG Newsroom. American International Group, Inc., 14 Mar 2009. Web. 14 Mar 2010. <http://media.corporate-ir.net/media_files/irol/76/76115/releases/031509.pdf>. Kennedy, Simon. "ECB, Fed inject $150 billion into jittery market." MarketWatch 09 Aug

2007. Web. 14 Mar 2010. <http://www.marketwatch.com/story/central-banks-move-to-boostmarket-liquidity?siteid=yhoof>.

Friedman, George. The next 100 years: a forecast for the 21st century. New York: Doubleday,

2009. pp. 16-17, 74.