Clear68° WeatherClear68° Weather
A Times Editorial

Why bail out AIG?

Washington Post

. . . There are some lessons here. The first, of course, is that AIG never should have been allowed to endanger the global economy in the first place. Appended to the firm's insurance business was an unregulated "financial practices" shop that exploited AIG's triple-A bond rating to sell derivative contracts supposedly protecting counterparties against remote economic meltdown scenarios. AIG set aside no reserves against these risks, so that, when they materialized, those who had bought the company's baloney suddenly found themselves at risk of failure. And AIG's customers included pension funds and big banks across the United States and Europe: The U.S. bailout of AIG is a bailout of the global financial system more generally. This is why U.S. officials believe that it's a necessary evil, even as the costs rise.

The second lesson relates to the plight of U.S. banks, at least one of which, Citigroup, resembles AIG in its global reach. No one should be under any illusions that the process of bailing out these institutions will be quick or straightforward. More likely, we're looking at years of government involvement. It has become distressingly easy to design scenarios under which it becomes necessary for the government to get more deeply into the ownership and control of banks than it already has — up to and including nationalization. The hard part will be getting out again.

Chicago Tribune

. . . But the credit crisis and the deteriorating economy have made it all but impossible to sell off the company's good assets. Would-be buyers of AIG businesses can't get financing.

And that leaves taxpayers, who already own 80 percent of AIG due to the previous three bailouts, as the only resort.

The Federal Reserve Board and the Treasury Department warned that the "potential cost to the economy and the taxpayer of government inaction would be extremely high." Okay, we get that.

AIG has 70 million policyholders around the planet, including 30 million in the United States. It provides insurance protection to 100,000 businesses, towns, retirement plans and other entities.

It has complex interlocking financial commitments with a who's who of major global financial institutions, many of which are on the brink themselves.

In short, it does business with the whole world. And so we hear the classic argument: AIG is too big to fail.

But . . . $180 billion in government aid? No end in sight? We understand the argument that an AIG collapse could sink us all. But the alternatives are looking just as ominous.

Washington Post

. . . There are some lessons here. The first, of course, is that AIG never should have been allowed to endanger the global economy in the first place. Appended to the firm's insurance business was an unregulated "financial practices" shop that exploited AIG's triple-A bond rating to sell derivative contracts supposedly protecting counterparties against remote economic meltdown scenarios. AIG set aside no reserves against these risks, so that, when they materialized, those who had bought the company's baloney suddenly found themselves at risk of failure. And AIG's customers included pension funds and big banks across the United States and Europe: The U.S. bailout of AIG is a bailout of the global financial system more generally. This is why U.S. officials believe that it's a necessary evil, even as the costs rise.

The second lesson relates to the plight of U.S. banks, at least one of which, Citigroup, resembles AIG in its global reach. No one should be under any illusions that the process of bailing out these institutions will be quick or straightforward. More likely, we're looking at years of government involvement. It has become distressingly easy to design scenarios under which it becomes necessary for the government to get more deeply into the ownership and control of banks than it already has — up to and including nationalization. The hard part will be getting out again.

The Obama administration this week promised another $30 billion to the American International Group, the giant insurer. This is the fourth time since September that taxpayers have rescued AIG, and the total federal commitment to save this one company is now roughly $160 billion. A sampling of editorials on the issue:

New York Times

. . . In a joint statement with the Federal Reserve on Monday, the Treasury justified the move, saying that "the potential cost to the economy and the taxpayer of government inaction would be extremely high."

That's a textbook rationale for any bailout. What no one is saying . . . is which firms would be most threatened by an AIG collapse. The Treasury and the Federal Reserve noted in their statement that AIG is a "significant counterparty to a number of major financial institutions."

That means that by enabling AIG to avert bankruptcy proceedings, the taxpayer is also bailing out — whom, exactly?

The AIG bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of AIG's demise. They are sophisticated investors, and they should have known the risks being taken . . .

Whomever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts. . . .

It is also painfully clear that more of the same black-hole bailouts are failing to restore stability or confidence. Stock markets worldwide tanked on Monday. A growing chorus of economists and commentators — including this page — are urging the Obama administration to adopt a more comprehensive solution: a government-run restructuring, or nationalization.

The government would not only take an ownership stake in firms that require extensive and ongoing bailouts — as it has done with AIG and Citigroup — but also direct control of the weakest. It would get a realistic assessment of the assets crippling them and revamp their finances before returning them to the private sector, where they would be smaller and healthier and could start lending again.

We know that many Americans are uncomfortable with the word nationalization — politicians even more so. But each new bailout of old losers only feeds mistrust of the government and weakens public support for the even tougher decisions to come.

Why bail out AIG? 03/03/09 [Last modified: Tuesday, March 3, 2009 6:14pm]

    

Join the discussion: Click to view comments, add yours

Loading...