The question we should be asking: Why are we bailing out AIG?

[BirminghamExaminer]

Excerpt:

Since last Autumn, representatives of our government have been telling us that some Wall Street companies are too big to fail and that they are on the brink of collapse. We've been told over and over that such "too big to fail" giants should therefore be "bailed out."

Why is AIG too big to fail? What would happen if AIG did fail? Does anybody who really knows the answer to that question willing to talk about it openly?

Matt Taibbi wrote an illuminating expose, "The Big Takeover" for Rolling Stone magazine detailing how AIG became the fragile diseased giant that it is.

Taibbi's article explains why AIG got into the trouble it's in (greed and lack of regulation) and also paints a frightening picture of how the U.S. government is being held hostage by Wall Street greed. Taibbi's article is important. Every American should read it.

Too many of us shake our heads at the Wall Street bailouts and financial shenanigans between the government and Wall Street because we intuitively know that something isn't right. But because we don't understand it, that's all we do; shake our heads and blindly trust the government to govern. Now is the time to step up and make the effort to understand what is going on and do something about it. The AIG bonuses that people are so angry over amount to a single raindrop in a hurricane and if we continue to allow ourselves to be distracted by the single raindrop without bothering to find out about the hurricane that's producing it, then we will continue to get the shaft.

What would happen if AIG were allowed to fail? The answer to that question is everywhere and nowhere. If you look for the answers you will find a lot of financial doublespeak that doesn't have any substance. Back in September, Michael Lewitt of Harch Capital Management said,

"AIG is a uniquely global company. It has relationships with virtually every other financial institution in the world. And its failure, its inability to meet its obligations would have caused a cascade of troubles for other financial institutions. It would have caused potentially other hedge funds and other companies to fail."

In response to Hewitt, I'd like to ask, "So?" Apparently AIG insured bad loans by making the bad loans look better than they were. They made the bad loans look good because they didn't have the funds to make good on the insured loans but figured it didn't really matter as long as nobody knew about it. By doing so, they could make a whole lot of money. They apparently have enough government money to give the people who insured the bad loans (by making the bad loans look good), huge bonuses.

To read the entire article go here. If you have any thoughts on how the collapse of AIG would cause the collapse of civilization as we know it, please leave a comment on the original article page. Thanks.

[david13]

1. Dude. It wasn't my idea. N/t

[BirminghamExaminer]

3. It's interesting that we've been lulled into forgetting to ask wtf we're bailing AIG out at all

[acmavm]

5. NO, some of us know very well why, and it really pisses us off. Just look

at this place. We're dividing into two groups. Those that resent the admin letting the guys who put us here run the bailout. Yeah right.
It's comparable to hiring a guy who raped and murdered a kid to babysit.

[Possumpoint]

2. My Opinion

AIG is involved with too many foreign banks and hedge funds. If AIG failed there would be a backlash against the US dollar. It could result in a reduction of investment in US Treasuries. That would scare the living "S" out of our government.

[On the Road]

4. If You Think AIG Was Expendable,

look what happened on Sep 15 after Lehman failed. AIG came on the heels of that and was arguably more critical to begin with.

[BirminghamExaminer]

6. I don't know what to think. Talk me down.

I honestly don't get it. I've been asking what "too big to fail" means of everyone and nobody has provided a satisfactory answer. I don't pretend to have an answer or even understannd. I simply question what would happen if we didn't bail out AIG. And I don't mean in terms of some ethereal stock market loss, but what would happen, step by step, line by line.

What happened to Lehman brothers...really, did that cause the economic doom ? I don't really think so. I think it just woke people up to the fact that we'd let the hucksters get away with stuff for way too long.

I've seen politician after politician say that "nobody could have seen this coming" when talking about the housing bust and economic catastrophe and I say bullshit. I've been discussing with ordinary American people who have nothing to do with financing, housing or politics the fact that this couldn't last forever. There were adverts for "never been able to get a loan before, you can now! You can get this $600,000 house with no money down by getting an interest only loan".....and my friends and I have been asking for at least 5 years, 'Who are all these people that are buying these million dollar homes all over our neighborhood? Are there really this many rich people around here?' If ordinary people like me (a used books store owner) and friends of mine like people who teach statistics in nursing were asking such questions five years ago, then for politicians and other financiers to say "nobody could have seen this coming" is at best incomprehensible and more likely just an out and out lie. Some people have gotten enormously rich off of these disasters in the last few years and it seems to me like we are turning all the means of "fixing" the problem over to those same people.

I want to be talked out of this thinking. Really. So please, explain it to me. Seriously.

[On the Road]

7. The Reason AIG Had to be Saved

is that much consumer and almost all business activity depends on credit.

If people and businesses cannot borrow money to buy houses, cars, inventory, etc, the economy can't function. The 6.8% drop we saw last quarter is nothing compared to the contraction that would take place without credit. The banking system collapsed in the 1830s and it took almost a decade for the economy to return to normal. That's why the financial sector is different from autos, retail, or any other industry, and why the administration is so desperate to prevent an implosion.

-----

Now most large banks and mortgage companies were teetering on the edge of collapse already because of real estate, the recession, and in most cases risky behavior. In addition, banks are connected through mutual investments, lending, etc. If Citibank, Bank of America, Goldman Sachs, and/or JP Morgan were to fail, it would have caused a chain reaction taking down the whole banking system.

September 15 demonstrates what happens when even a single large company fails -- the Fed had to step in and make $2T of short-term loans to keep one or more institutions going. (My guess is JP Morgan, but they won't say out of fear of causing a run on the institution.) It required extraordinary effort and resources to keep the whole system from failing, even though it was only one firm that went bankrupt.

-----

AIG had stupidly bet the house writing insurance policies against large blocks of mortgages failing, so they got hurt the worst and were in debt to many other companies. Those downstream companies in many cases could not survive the losses that if the policies were no good, just like you might have to declare personal bankruptcy if your house burned down and the insurance company couldn't pay you.

That's why all the attention to AIG. I don't think Obama and Geithner care about the company itself, but about the consequence of its not paying off its insurance policies to all these other companies. Many of them are European, but the whole world is interconnected now. Despite the cost, it is better than the consequences for all of us.

[bottomtheweaver]

8. Oh please.

It's backed by the Bushler intel apparatus that knows where and when every orgasm on the planet has occurred for the last 62 years, that's why it's too big too fail in a nutshell.

[BirminghamExaminer]

10. Explain in simple English for dummies like me?

[bottomtheweaver]

11. Sure.

Basically we're being blackmailed by an international criminal operation headquartered in London. AIG has always been a racket though it's apparently snapped up lots of legit insurance oufits to steal their capital. S&L crisis redux. That's about the best I can do offhand but I can give you a more seriously researched answer later.

[bottomtheweaver]

12. This might be helpful:

"The relationship between AIG and CIA"

The American International Group at its origins was linked to the OSS (Office of Strategic Services) the forerunner of the CIA. It grew from the Asia Life/C. V. Starr companies founded by Cornelius Starr who started his insurance empire in Shanghai in 1919, the first westerner to market insurance in China.

Starr served with the OSS during World War II, and the Starr Corporation, located in the same building as the OSS in New York, provided intelligence on shipping, manufacturing and industrial bombing targets in Asia and Germany. The companies' biggest shareholder was Starr International Company (SICO), a private holding company incorporated in offshore Panama and with principal executive offices in offshore Bermuda, to avoid U.S. regulation and taxes. Starr left Greenberg a large block of Starr International stock.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=125&topic_id=92675&mesg_id=96045

The OSS was the US WW2 military intel operation that was converted into the CIA in 1947.

[BirminghamExaminer]

13. thanks. Still trying to read and research and process

[bottomtheweaver]

14. It all seems kind of preposterous at first

but the pattern emerges quickly and pretty soon you see the scam for what it is and you wonder why everybody else can't. Anyway, here's another good post in one of Octafish's recent DU threads (the link to the LA Times article is in the OP):

"The Secret Insurance Man" Explains Why AIG Is Getting Bailed Out

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5205337&mesg_id=5207907

[On the Road]

15. If That's Your Level of Analysis,

believe whatever you want. Apparently Obama, Krugman, and every other Democratic leader in a position to know has fallen right in line with the Bush agenda.

[bottomtheweaver]

20. Krugman said last week that "The zombie ideas have won"

so I'd rule him out as a fellow traveler:

"Krugman: Despair over financial policy," March 21, 2009
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

Obama didn't create this mess and I don't know that he's heavily invested in the AIG scam so I'm not blaming him either. Yes I wish he'd gone with a more drastic solution out of the gate but Rome wasn't built in a day and he's inevitably going to have a few false starts but I imagine he'll get there eventually barring catastrophe.

As for my analysis, you're probably right. Your post deserved a more thoughtful rebuttal. Instead of reinventing the wheel though here's a link to a thread posted yesterday by Time for change which makes the point more lucidly than I could:

"On the Geithner Bailout Plan – Liberal Vs. Conservative Views"
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5331534&mesg_id=5331534

[On the Road]

22. Thank You -

That was a very thoughtful post, and I had never seen the views of Krugman, Stiglitz, and Riech juxtaposed with each other like that. It is a trusim, however, that no two economists ever have the same opinion on any subject, so dissenting viewpoints are not as troubling to me as they are to you.

There are really two major bases for criticizing the Obama plan that I can see: that it will be ineffective and that it rewards the wrong people.

Time will tell whether it will be effective. Krugman prefers taking some banks into FDIC receivership, which might be an effective approach, but it doesn't invalidate the good bank/bad bank idea. It depends on the value of the assets and how they are sold. Krugman also thinks it will create Japanese "zombie banks" that will delay the recovery for years. That remains to be seen. Not all banks are on the point of failure, and those that are have been given enough capital to keep lending. A lot of it depends on confidence and the public mood. Once there is a consensus that the corner has turned, lending can resume very quickly.

As far rewarding the wrong people, the money has not been given to be banks freely. Most of it is in preferred stock at 6% interest and will be recovered unless the banks fail. Most executives have sizeable holding in their company stocks and have been pretty much wiped out in that department. That is how it is supposed to work.

[bottomtheweaver]

26. Okay but the question in the OP is, why are we bailing out AIG?

AIG isn't a bank, and its fruadulent "products" were not federally insured, so where's the logic in wasting federal funds on them as though they were?

Answer: on one level or another, blackmail. That's the way MIC-CIA works.

[BirminghamExaminer]

9. I hope you're right

but I'm still not buying the whole, "if we don't do this, credit will collapse" because that's what we were told about the first half of the TARP funds and none of that money went to credit lending unless I'm mistaken. How many times do we have to bail them out before they actually use the funds to trickle down. Why haven't the small local and community banks gotten any money from this? Where did the money go that was paid to these guys already?

[On the Road]

16. First of All, Thank You for the Civil Replies

It has become so rare to have a respectful discussion here, especially on this topic.

The TARP money had two purposes: (1) to prevent banks from going under, which it did, at least temporarily. (2) to provide them funds to increase lending, which it may or may not have. Banks are still lending, but they've tightened up requirements, which they should, and there are fewer people in good financial standing to qualify for loans. It's a bit of a Catch-22 for banks, but they have money to lend if you qualify.

As far as credit unions and smaller banks who were in good financial shape and didn't require TARP funds, they probably didn't need or want it. TARP money was not a gift -- most of it was used to buy preferred stock at 6% interest, eventually rising to 9%. Wells Fargo is on record as saying they weren't completely thrilled to have the government as an investor.

The government will get all the TARP money back for any bank that stays in business. AIG was too far gone, and the government's going to lose money, but things go well they'll be the only one.

As far as where the money went, it depends on what you mean. If someone puts $1000 in your account when you're on the point of bouncing checks, where did the money go? Unless you splurge on something, it simply enables to keep going with a bit of clearance. It goes to the same place that it would go if they made another stock offering or an outsider bought a piece of the company the way Warren Buffet bought a chunk of Wells Fargo recently.

The major exception is AIG -- most of their money went to paying off policies to other banks who were insured against blocks of mortgages defaulting. Since real estate is still unraveling, no one knows whether that process is finished yet.

[mbperrin]

17. And yet a sovereign nation, the USSR, failed, a nation with atomic

weapons, our only real competition on the planet, and their failure did not lead to any systemic problems here (or there, as it works out, because the Russian economy is certainly better than the USSR one).

Are you saying that AIG has more power and influence than the old USSR?

Just curious.

[On the Road]

19. Yes, the Impact of an AIG Failure

would have been much greater than the failure of the USSR was. It wasn't the company itself as much as all the others that would have been impacted and the already precarious situation of the affected industries.

[mbperrin]

21. Any actual analysis to go with that statement of faith?

Seems to me Sputnik was a world-changer. So was the Cuban missile crisis. Iron Curtain. MAD. Duck and cover.

What precarious situation of which affected industries? Looks to me like mostly the folks who gambled without money to pay if they lost will just have to admit to the "winners" that the winners have lost their stake. They haven't lost their "winnings" because that never existed, and by the same token, AIG hasn't lost that money because they never had it.

Where I was raised, people who welshed on gambling debts suffered, most of all their reputation, which could never be repaired, and which would end their gambling privileges, period. But that was the end of it. No one expected the local government to make good on their poker winnings.....

[On the Road]

23. Here is One Editorial from the NYC That Makes a Case for It

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow....

Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression"....

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.

http://www.nytimes.com/2008/09/16/opinion/16lewitt.html?_r=3&ref=opinion&oref=slogin&oref=slogin

Here are a couple of other articles concerning Europe:

"If AIG is allowed to fail -- many banks holding CDS paper from AIG could also fail," said Mark Keenan, insurance partner at law firm Anderson Kill & Olick. "In other words, I don't think the U.S. government can afford to allow AIG to fail -- no matter how many bandaids may be needed," he added.
http://uk.reuters.com/article/businessNews/idUKTRE5202MN20090301

"One of the reasons we had to rescue AIG was the fact that it was going to bring down Europe," Rep. Paul Kanjorski, D-Pa., told reporters after his subcommittee held a hearing on systemic risk.
http://www.businessinsurance.com/cgi-bin/news.pl?id=15655

As Time points out, no one in the world could predict with confience what would happen if AIG defaulted on its obligations. The conviction that it was too big to fail comes from the fallout from Lehman and comparing the relative sizes -- not just the size of the the firms, but of the unfunded obligations, which were an order of magnitude greater in AIG's case. It is, of course, possible to get an idea by looking at the balance sheets of each of the firms AIG had obligations to, but you can get a general sense without doing all the calculations.

On the other hand, skeptics seem to be limited to metaphors and statements of principle.

The effect of bank failures in general can be seen from earlier financial crises such as the depressions ushered in by bank failures in 1837 and 1873, as well as crises in developing countries in the last 10-12 years. No two situations are the same; what is important is the domino effect within the financial industries and the impact on the entire economy and society at large.

[mbperrin]

24. I see lots of damage to banks predicted here. Same thing as the 80s.

Same old "be afraid!!!!" they've used to keep us in line against the Commies, and now the terra-ists.

Banks fail all the time, even big ones.

Just don't find any reason for me to give these guys my money.

Thanks for the research.

[On the Road]

25. Well That's Good News Then

because with the exception of AIG, we haven't given money to any of these companies.

[truedelphi]

18. The litmus test for me is this: what would FDR do? He would not

Prop up the Wall Street crowd. He was proud of saying that he thought it every bit as dangerous to deal with "Organized money" as it was to deal with "Organized crime."

There are different things that could have been done. Put AIG in receivorship, and sell off positive parts of the business. Remember there are people inside AIG who were trying to tell Liddy and others what a criminal and foolish stance AIG was taking. They could be given management positions.