AIG Frustration

16Mar09

First of all, this isn’t a rant about how awful AIG is. There’s enough coverage of that already, and besides, they sponsor Manchester United, so yours truly always knew something was up.

Instead of just being angry, it’s important to know why we are angry and why we aren’t doing anything about it. The first part of understanding why nothing is being done is because we don’t know what to do. Legally.

Lest we forget that we do live in a country that does try to seperate the private sector from the government as much as possible. We live in a country with rules, I know it’s been 8 years since that’s happened, but in it’s spirit, it always has remained the same. Part of our attempted guarentee of the pursuit of happiness means that government is often not supposed to get involved. That’s not my personal belief, it’s part of our Constitutional identity. In truth, we can’t tailor our constitution to this one specific problem.

Anyway, it was that philosophy that drove Republicans and friends of the banks to look the other way the past few years (the Republicans for longer), and the government looked away while AIG became perhaps ground zero for the economic rise and fall.  AIG grew too big to fail, and I don’t think people fully understand what that even means.

Here’s an example. Huffington Post provides just a snapshot of what AIG had to pay out as insurance against, essentially, economic catastrophe

Goldman Sachs at $12.9 billion, and three European banks — France’s Societe Generale at $11.9 billion, Germany’s Deutsche Bank at $11.8 billion, and Britain’s Barclays PLC at $8.5 billion. Merrill Lynch, which also is undergoing federal scrutiny of its bonus plans, received $6.8 billion as of Dec. 31.

AIG had grown, quite simply, bigger than the US, or rather the US economy. It capitalized itself with money that wasn’t quite fake, but rather, made-up. I’m probably not the best person to explain derivatives, but please feel free to explore the internet’s vast resources on what happened with that market.

That is why we have to keep bailing them out; the glodbal economy goes kablooie if we don’t.

So the question is, what do we do about the people at AIG who broke the letter or the intent of the law? There’s apparently a “populist explosion” over the fact that AIG is paying out 160million in bonuses last year. I don’t find myself particularly surprised or upset.

For years, leftish liberals have been talking about corporations being our downfall. First of all, can we admit they were right? They also happened to be right about global warming. In fact, can we also finally admit that an unregulated free market, at best, leads to instability and at worst catastrophe? Obama’s election was part of that solution, although his centrist tendencies do not allow the debate to be framed that way. Personally, I saw this coming and I wouldn’t have let it even affect my life if it weren’t for the ubiqitous news coverage. In fact, perhaps my greatest source of frustration during all of this isn’t that we didn’t see it coming, it’s that at no point, we wanted to see it coming.

The AIG problem has left even our greatest political minds grasping at straws. Bernanke claims of “slamming the phone a number of times,” Geithner’s “hands are tied” (and believe me, he’d do anything to raise his popularity, and the normally brilliant Marc Ambinder came up with this as his best shot:

As recounted below, there’s not so much that the executive branch can do — and should do — to prevent AIG from handing out loopy bonuses. But why can’t Congress pass a law requiring that bonuses granted by a company that has taken bailout money from the Federal Reserve or TARP be taxed at a very high rate? Obviously, Congress would have to find some way to distinguish between legitimate performance pay and illegitimate bonuses, but a one-year tax hike on all such bonuses might not be unpalatable. It’s a much saner alternative than to give the Treasury the instruction to root through contracts to find ways of breaking them.

It’s a cute idea, but it seems like an ex post facto law, and thus it won’t fly. It’s also an idea that the far left has been screaming about for years. But nevermind that; don’t you think Congress thought about this, Marc?

Sorry, I don’t mean to do the Olbermann/O’Reilly callout, but it’s an idea that just wreaks of naivety. Congress didn’t do anything when the auto bailout CEOs flew in on planes, and they didn’t see this coming?

There’s one of three ways to rationalize their behavior. I’ll be kinder to Ambinder and use one of his ideas first: Outrage. It’s why a steroid scandal was brought before Washington in a massive spectacle. Politicians love looking morally outraged; it helps in elections. The second way to see it is as biproduct of corruption. These banks were in the pockets of some of the most powerful people in Washington; Frank, Gramm, McCain, Waters, Dodd…on both sides, the banks have these politicians covered, so of course they won’t do anything. The third is political/legal: is it the governments role to step in stop bonuses from being paid? In a conservative world, no. In a liberal world, it’s something you should be afraid about implying for fear that a Republican will call you a communist/socialist.

I’m not saying we shouldn’t be angry. We should, again, we have to understand why so it doesn’t happen again. Understanding that means some sad realities, namely that it will take a while for the economy to recover and that the economy won’t be as big as it was pre-2008. That’s something I fear Americans will never understand.

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