Archive for the ‘AIG’ Category

Not only did the bailout of AIG help stem losses at Goldman Sachs, but it let them avoid all housing related losses from its huge MBS exposure by subsidizing their credit default swaps with AIG–in effect, in surance policies–dollar for dollar.  Not a penny in losses.  And, worse, Tim Geithner, working then as NY Fed Chairman in late 2008, colluded with them to hide this scandalous situation from the public:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”

Isn’t this amazing?  This is the worst kind of crony capitalism.  Mexico and Indonesia could do no worse.  What free market principle says a big risk-taking investment bank can never book a loss?  What principle says this institution, which never was FDIC insured, was not a money market, and was known for its knee-deep exposure to housing, could avoid all housing-related losses as millions of Americans struggle to pay down their upside down housing notes or get walloped with the credit devastation of a foreclosure or bankruptcy?

The only thing saving Wall Street from a pitchfork rebellion by the middle and lower classes is the byzantine confusion created by “financial engineering.”  The principle here is no principle at all:  the primitive idea that connected super-big and super-rich firms and people can fleece us, pass their losses onto the public, and confuse and bribe our politicians into doing whatever they want.

Goldman Sachs is a dangerous, anti-democratic and anti-free market behemoth.  It serves one purpose:  enriching its senior management at the expense of the public, the government, and even its own shareholders.  And Tim Geithner is a weak-willed and mealy-mouthed moron, whom it should be increasingly obvious was suggested as treasury secretary by the powers that be because he was a useful idiot and strawman who would do Wall Street’s bidding at the expense of the general public.

Goldman Sachs should be liquidated, the personal assets of each of its managers and directors for the last ten years clawed back into a fund, and this sum should be distributed pro rata to every American taxpayer.  Unjust you say?  Well, no more unjust than the crony capitalist principle that lets them do this in reverse.

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The meltdown of AIG, Merill Lynch, and Lehman Brothers in the last few days is remarkable. I’m nearly speechless at the scale of these failures and what they portend for the economy generally. I can’t pretend to fully understand their causes, likely consequences, and the desirability of particular regulations to avoid such failures in the future.

My first thought is that bailouts are a huge mistake. Risk has been made public, while the benefits of the last ten years have been notoriously private. Fed Chairman Bernanke has misdiagnosed these problems as a liquidity crisis rather than the predictable contraction of bad investments following an overheated expansion by the market responding to the combination of perverse incentives, cheap credit, and underregulation.

Speaking of regulation, conservatives should not necessarily oppose all of it. There is a big difference between price controls and regulations that address systems of private behavior with public consequences. For example, banking regulation to encourage transparency and solvency in the form of adequate reserves and sound investments is perfectly sensible, with or without the hook of banking insurance in the form of the FDIC, because banks operate as trustees of large amounts of private wealth deposited by relatively unsophisticated investors ill-equipped to oversee these institutions.

Unfortunately, central banking and deficit spending have made our government to some extent hostage to a handful of private investment banks that trade in government debt. The “liquidity crisis” is also a crisis of the government’s ability to deficit spend. Conservatives should not necessarily renounce some repudiation of that debt, if such a repudiation punished the enablers of mass government spending. Bad credit for the government would be a good thing for the public, making expensive endeavors like the Iraq War, farm subsidies, and prescription drug benefits a thing of the past. Regulation should aim above all at stability, transparency, and buffering of the economy as a whole from the actions of a small circle of risk-preferring speculators.

Government bailouts of entities on Wall Street, as well as large companies like AIG, would further entangle profit-motivated private businesses and the federal government, whose watchword should be fiscal restraint and immunity from the rise and fall of one sector of the economy. The Fed’s multiple bailouts of Bear Sterns, Fannie Mae and Freddie Mac, and now AIG invite the government to get more in bed with economic enterprises in order to control their decisions, in effect picking winners and losers. This would create a pretext for greater regulation of the content of economic activity–as opposed to the result-indifferent rules–in the name of protecting the government’s own interest in raising revenue.

A reckoning is on the way. There are something like $60T in underfunded “credit default swap” obligations out there. This is 6X the United States’ annual economic activity. The combination of parallel government debt, undersecuritized private debt, opaque securitized mortgage instruments, and the inevitable encroachment of these failures on ordinary financial institutions like banks and small business credit portends a sustained series of cascading failures. The market’s rally today is more like a death gasp.

Any conservative approach to economic regulation should first acknowledge what government does well and what it does poorly. Straightforward limits on certain volatile or fraud-laden economic activities–trading on margin, usury, risky bundling of subprime mortgages–should be distinguished from ill-advised price controls and government involvement in aggregate consumer preference for this or that product and service. Conservatives should also prefer the concentration of pain on the risk-takers rather than taxpayers. If Wall Street is bailed out–as it has now been on multiple occasions–it is unseemly and unsustainable to employ the rhetoric of obligation in relation to “upside down” homeowners and other under-water debtors. But this is exactly what recent events, including the giveaway to credit card companies several years ago and the taxpayer bailouts of companies like Fannie Mae and Freddie Mac and now AIG, mean.

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