AIG's $85 Billion Bailout: See What Anti-Regulation Ideology Can Do?

by Deb Cupples |   The Federal Reserve has reversed its tough-love approach and decided to lend up to $85 billion to AIG (one of the world's largest insurers), to prevent the massive company from declaring bankruptcy. (See also Wall Street Journal)

Yes, the Fed had to do it, because an AIG bankruptcy would have done monstrous damage to our economy and launched shock waves across other nations' economies.

The key, however, is to not simply bail out AIG but also to figure out what went wrong and try to prevent such things from happening in the future.

Shortsightedness and unbridled greed on the part of the people running AIG likely contributed to the company's financial dire straits. 

We've seen that before: think Enron, WorldCom, and -- more recently -- Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Lehman Brothers...).

During the Bush Administration's anti-regulation and anti-accountability free-for-all (which some people glorifyingly mis-labeled "free-market principles"), the human beings that make many companies' decisions have been largely left to their own devices. 

Unfortunately, many corporate execs focus largely on enriching themselves (even more so than building their companies or enriching the shareholders who pay their salaries and perks).

The pairing of motive and opportunity can be deadly, as we've all seen on TV crime dramas.

In the corporate realm over the last 7+ years, we've seen that disastrous pairing over and over again: our government's failure to adequately regulate our nation's biggest businesses and financial institutions has created the perfect climate (opportunity) for the people making corporate decisions to satisfy their personal greed (motive) -- even if doing so would foreseeably cause companies to crumble, Americans to lose jobs, and our economy to teeter on the brink.

While thousands of ordinary AIG shareholders will helplessly watch their retirement funds shrivel, many corporate decision makers already stashed away enough money so that they won't even have to find new jobs.

The New York Times online version stated the following -- before someone edited out the statements below (fortunately, I had copied the article into a Word doc fifteen minutes earlier):

"A.I.G.’s crisis grew primarily out of its financial products unit, which dealt in complex debt securities and credit default swaps.

"The swaps are not securities and are not regulated by the S.E.C. And while they perform the same function as an insurance policy they are not insurance in the conventional sense, so insurance regulators do not monitor them either."

In short, the cat was away, so AIG's mice were left free to play in whatever manner they wished -- and without regard for the shareholders or our nation's economy.

And now, we taxpayers, are forced to fork over money to prevent AIG from facing the natural consequences of its executives' actions. 

What a nice reward for abysmal behavior.  Next, we'll be letting convicted murderers out of prison and sending them on all-expenses-paid excursions around the world: first-class accommodations, and all.

Something's gotta give. 

Finally, the people that we taxpayers pay to run our federal government must stop succumbing to the public-unfriendly demands of corporate lobbyists and donors.  Finally, our government officials must put sensible regulations and monitoring programs in place. 

That's the only way to prevent the huge, economy-threatening corporate meltdowns that we've been reading about over the last couple weeks. 

 Memeorandum has commentary.

Other buck Naked Politics Posts:

* Lehman Brothers Bankruptcy: What it Might Not Mean

* FDIC Says More Bank Troubles Ahead

* Obama Pummels McCain on Economic Policy

* John McCain says Economic Fundamentals Still Strong?

* Bailouts & Stimuli: Will Congress Encourage Bad Behavior?

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Comments

[Ed]

Why is it that our government can rescue billion dollar corporations, but not give a damn to small businesses in trouble? Also, if the government has 85 billion to loan to AIG, why is universal health care "so expensive" in the view of many congessmen?

[Deb Cupples (Buck Naked Politics)]

Ed,

You raise some good points.

[Charles Hill]

Democrats blocked Bush’s Fannie Mae and Freddie Mac Reforms.
''These two entities -Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the
Financial Services Committee.
http://strategicthought-charles77.blogspot.com/2008/09/democrats-blocked-bushs-fannie-mae-and.html

[Tony]

Credit default swaps are nothing less than bets on mortgages that the homeowner WILL default on the mortgage. AIG, due to deregulation, was allowed to sell thousands of these CDS Issues for every $100,000 in mortgages to anyone who had access to the CDS shadow market.Without holding onto any reserve funds (like regulated insurance policies) So when a homeowner defaulted on their mortgage, say for $300,000, there were 1000s of CDS issues that had to be paid off to shadow market investors. Instead of congress bailing out AIG so they can pay their CDS debt, congress should of just made good on the underlying mortages thus negating the impact of CDS contract owners demanding payment. One has to ask, why did congress bail out AIG, who stood to gain by CDS's being paid off with taxpayer's money? Could the Money trail lead right back to special interest grops and even congessional members themselves?

[Tony]

Just a few more points. Most, if not all, of Credit Default Swap revenues generated by AIG was doled out as sales commissions to their financial products department heads and other executives at AIG. The money was not reinvested in the company, these were cash cow transactions and unregulated. Executives made millions each from this business, pure greed. The CDS Issue price was very low because AIG had frauduantly rated the underlying mortgages as AAA, even though these mortgages were the worst of the subprime mortgages and extremely risky. But they bundled them to sell them as low risk investments, then came up with the CDS derivitive cash cow that collapsed as the homeowners defaulted. AND WE THE TAXPAYERS HAVE TO PAY? GIVE ME A BREAK! It is the same as if everyone in a neighborhood purchased a fire insurance policy on one home where the idiot son was prone to playing with matches. the house burns down and everyone collects for the value of the home, EACH making a killing because the policy premiums were dirt cheap.