The Ransom of AIG
12/1/09 | 12 comments
Editorial

The Ransom of AIG


On the face of it, $182 billion was a lot to pay for the “rescue” last year of the American International Group, even though the mammoth global insurance company was judged too big to fail and even though American taxpayers may get some of it back.

A report on the bailout by Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program blames Federal Reserve Bank of New York and Treasury Secretary Timothy F. Geithner, who headed it at the time. Mr. Barofsky also targeted Mr. Geithner’s Treasury Department and the Federal Reserve Board in October for their failure to prevent and even know about the $165 million in bonuses AIG planned to pay some of its employees next year.

The government watchdog’s report was published just as Congress is taking up the questions of whether the federal regulation of big financial institutions needs improving and whether or not the Fed is the right agency to take the lead in regulation.

Mr. Barofsky accused the Fed of failure to develop a workable rescue plan when AIG looked unable to meet demands that it pay off big insurance contracts to American and foreign banks. Instead of bargaining with these “counterparties” and forcing them to take a loss on these toxic assets, the New York Fed paid top dollar, far above their market value at the time. The report said that the effect of the federal assistance to AIG was “tens of billions of government money was funneled inexorably and directly to AIG’s counterparties.” Wall Street firms including Goldman Sachs, Merrill Lynch and Wachovia, as well as foreign banks like Societe Géneral and Deutsche Bank got full value for their soured derivatives contracts and American taxpayers got the bill for $27.1 billion.

The Barofsky report dismissed the excuse that Treasury and Fed officials lacked legal power to exert leverage and strike a better bargain. After all, they weren’t shy about using leverage to force nine big banking firms to accept TARP loans whether they needed them or not, and they used plenty of leverage in negotiating federal aid to General Motors and Chrysler.

The report went on to remind us that Mr. Geithner and the Fed stalled for four months in revealing the names of the firms that got the 100 percent payout on their devalued contracts. They said the disclosure would undermine AIG’s stability. But Barofsky noted that when they finally put out the details, “the sky did not fall.”

A rejoinder by the Fed and the New York Fed acknowledged the need for better regulation of the huge financial institutions: “More effective supervision might have identified and blocked the extraordinarily reckless risk-taking at AIG.”

They could well have added that while big financial firms may be too big to fail, they should never be considered too big to accept losses resulting from reckless risk-taking or restrictions on giving out big bonuses for poor performance.

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Comments
12 comments on this item
On 12/1/09 at 3:27 AM, coopah wrote:         Repeated separate thumbs down will cause comment to be hidden

The Fed should give every United States citizen, between the ages of 18-80 one million dollars each. That would solve the problem and not cost as much as the bank bailouts have.

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On 12/1/09 at 6:49 AM, Stevey_Dee wrote:         Repeated separate thumbs down will cause comment to be hidden

Yes, and a gallon of milk would be $30.00...

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On 12/1/09 at 7:00 AM, ElectraGlide wrote:         Repeated separate thumbs down will cause comment to be hidden

Danged If You DO

Danged If You DON`T

AMERICA what have You BECOME

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On 12/1/09 at 8:09 AM, HarryHSnyderIII wrote:         Repeated separate thumbs down will cause comment to be hidden

The failure to learn from history, and the huberous of the US financial elite caused this dysfunction in the banking and insurance sectors. It was through Five administrations both Democratic and Republican that the safeguards placed on businesses following the last "depression" were slowly removed. When finally Insurance companies were allowed to become banks, and banks were (after 70 years) again allowed to dabble in insurance, the scene was set. What happened had to happen, because the same thing had happened before, with similar consequences.

My father once theorized that capitalism makes a poor system for the rank & file, because it prohibits allowing anyone to make a car which lasts a lifetime, a home which doesn't need repair, or a society which limits risk to a level where we do not need insurance or lawyers. We actually have the technology to do these things, but we do not.

A perfect example of this is the "guardrail" a small mistake by one driver and he bounces off the guardrail, back into traffic where many more cars are now involved in the original driver's mistake. Would it not be better policy to allow the first driver to pay for his mistake by having to tow his car out of the puckerbrush? An even better solution would be to use "forgiving" highway barriers which grab and hold an errant auto, instead of tossing it back into traffic. We have this technology too, but, then far fewer auto's would be sold, fewer guardrails would be produced, and all the businesses which profit from an auto accident would be less profitable.

At AIG, a big business hit the guardrail. it bounced back into traffic, and now we all must pay for their mistake. look closely, WE PAY, they get bonuses.

Great system you got to love it.....If you are the royalty!

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On 12/1/09 at 8:42 AM, ElectraGlide wrote:         Repeated separate thumbs down will cause comment to be hidden

OMG @HarryHSnyder111

You Wow Me Ever Single Time

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On 12/1/09 at 9:45 AM, fmrmti wrote:         Repeated separate thumbs down will cause comment to be hidden

Actually, HarryHSnyderIII, I think the rank & file have the most to do with not building a car that would last forever. Do you see the UAW allowing GM to build such a car and then close up shop?

It's pitiful how these companies are allowed to get so big that their failure would damage our national economy. Will we keep this from happening again? Probably not.

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On 12/1/09 at 10:48 AM, pjramsay wrote:         Repeated separate thumbs down will cause comment to be hidden

HarryHSnyderIII - stellar performance, Pulitzer material!!!

How about establishing a government oversight committee that will place board members at all companies that the U.S. government bailed out. If we the people, now own 35% of AIG, we should have 35% of the board seats. Thus, when the board decides to vote to pay out exorbitant bonus', we have a say in the matter.

If the bailed out company doesn't like US meddling in their internal affairs, they can buy US out - with interest.

Gotta love capitalism............

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On 12/1/09 at 1:25 PM, JonAlbrecht wrote:         Repeated separate thumbs down will cause comment to be hidden

1. "the too big to fail" institutions should be broken up.

2. the revolving door between wall street and government must end.

3. financial transactions should be taxed and the funds committed to future bail outs.

4. the depression regulations restored.

5. all financial institutins regulated

6. new financial instruments must be approved by regulators

7. Institutions that engage in fraudulent activities must be liquidated at the shareholders expence.

If we start here, future collapses are unlikely to be systematic.

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On 12/1/09 at 1:37 PM, fmrmti wrote:         Repeated separate thumbs down will cause comment to be hidden

Nicely put, JonAlbrecht...I second the motion.

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On 12/1/09 at 4:20 PM, HarryHSnyderIII wrote:         Repeated separate thumbs down will cause comment to be hidden

JonAlbrecht Did you know that Teddy Roosevelt already did 4 of your seven? he also stopped Banks from selling real estate as broker, outlawed interlocking boards of directors, and eliminated "holding companies. He broke up Standard Oil, and told the railroads they had to play by the rules of face government take-over.... BTW he was a Republican. If Teddy's rules were in effect during the 1990's we wouldn't be where we are now.

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On 12/1/09 at 5:47 PM, theotherjimmyolson wrote:         Repeated separate thumbs down will cause comment to be hidden

Isn't it amazing how much progress we have made in the last 100 years (sarcasm) Also how the people who are consistantly wrong rise to the top, while those who are consistantly right are marginalized.

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On 12/1/09 at 7:47 PM, LilMikey wrote:         Repeated separate thumbs down will cause comment to be hidden

When Glass-Steagall was repealed, it was letting the foxes into the chicken coop. The repubs wanted this and the dems wanted to enhance the CRA so they made a deal. Let the foxes run wild but we will make sure everyone can own a home no matter if they can pay for it or not.

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