Should the Feds Bail Out AIG?

September 16, 2008

Comments

AIG is the largest insurance company in the U.S. and it has asked the U.S. government for help.

AIG, the largest US insurance company by assets, is reported to have asked the Fed for a $40bn ‘bridge loan’ to tide it over while it sells assets and attracts new equity. Unless such support is forthcoming, the company fears a downgrade by the rating agencies before it can shore up its capital base. Such a downgrade could further weaken its balance sheet, leading to a downward spiral and possible bankruptcy.

Why is AIG in trouble? The sub-prime mortgage meltdown of course. AIG provided default insurance on mortgage backed securities and now that that market is melting down AIG is watching its own position melt down.

My first reaction is that the Feds should tell AIG, “Too bad.” My thinking is that if the company is so badly leveraged that it can’t save itself why should the taxpayer be on the hook? Further, if the company is merely in a tough spot that it can weather then let it weather the tough spot and learn a valuable lession. Sure letting AIG possibly fail would be unpleasant, to put it mildly, but is a bailout any less painful? For AIG yeah, but what about the taxpayer? I’m guessing that neither option is good, but why prop up people who have acted stupidly?

Yes these things can be painful…very painful. However propping up badly managed financial institutions that are saddled with bad debts isn’t doing anyone a favor and is merely postponing the day of reckoning or shifting the problems to another party, in this case the taxpayer.

30 responses to “Should the Feds Bail Out AIG?”

sam

September 16, 2008 at 3:16 pm

Further, if the company is merely in a tough spot that it can weather then let it weather the tough spot and learn a valuable lession. Sure letting AIG possibly fail would be unpleasant, to put it mildly, but is a bailout any less painful? For AIG yeah, but what about the taxpayer? I’m guessing that neither option is good, but why prop up people who have acted stupidly?

My first reaction is too say “Absolutely!” (esp. with regard to the people acting stupidly part).
But the real question concerns the letting it fail would be unpleasant part. I guess the question is how unpleasant? I don’t the answer, but I do think that’s the question.
DC Loser

September 16, 2008 at 3:17 pm

These people on Wall Street kept telling us during the good years that the market didn’t need regulation and that the market would self-correct. That’s right, they’re self-correcting as we speak. Don’t put government money into this mess as it’ll only prolong the inevitable.
Dave Schuler

September 16, 2008 at 3:24 pm

I’ll repeat what I said earlier about Fannie Mae and Freddie Mac: part of the agreement should be limiting executive compensation to what a GS-14 would receive.

AIG needs to be rescued but not for the reasons being presented. The problem is its international holdings.
Steve Verdon

September 16, 2008 at 3:25 pm

The market is regulated DC Loser, to pretend otherwise is intellectually dishonest, and yet we are self correcting.

And this isn’t new.

We had a correction under Clintion and the tech bubble. We’ve had other corrections in that past as well. Both in real estate and in the financial sector. Under both Republicans as well as Democrats.

How come? Maybe because regulations, at the end of the day, don’t work? Maybe? Possibly they even lead to these kinds of problems by letting people think, “Hey the government has got my back, so why should I bother figuring out if this is a good company or not”? Does this possibility even crop up on your radar?
Steve Verdon

September 16, 2008 at 3:26 pm

Dave,

Could care less about its international holdings. A badly run company is a badly run company. Propping up such a company is always going to be a suckers game.
Bithead

September 16, 2008 at 3:36 pm

I tend to agree as a matter of basic principle, Steve, but I have to tell you I’m a litte uncomfortable with laying all of the blame on AIG.

Let’s recall, please that AIG is in trouble just now in major part because they had a $600MUSD stake in Fannie and Freddie, and that the mismanagement of those two is a direct responsibility of the government; They’re not private companies, regardless of the claim.

And by the way, would it interest you to know Jamie Gorelick was involved in a 10BUSD dollar scandal at F&F when she was a director, there, which helped to set up heir current failure?

Yes, kids… the very same one who set up the ‘wall of seperation’ that set up 9/11, and hen was on the 9/11 board which fatally compromised her. That Gorelick.

So, yes, while I normally, and in the absense of governmental misdeeds, would be all for letting AIG sink, frankly, I’m less than comfortable with the governmental equivalent to Otter saying to Flounder: “Flounder, face it, you screw up… you TRUSTED us”.
Steve Verdon

September 16, 2008 at 3:57 pm

Let’s recall, please that AIG is in trouble just now in major part because they had a $600MUSD stake in Fannie and Freddie, and that the mismanagement of those two is a direct responsibility of the government; They’re not private companies, regardless of the claim.

It is AIG’s responsibility to make sure that what they are investing in is sound.

And by the way, would it interest you to know Jamie Gorelick was involved in a 10BUSD dollar scandal at F&F when she was a director, there, which helped to set up heir current failure?

Yes, kids… the very same one who set up the ‘wall of seperation’ that set up 9/11, and hen was on the 9/11 board which fatally compromised her. That Gorelick.

It is still AIG’s responsibility, unless you are suggesting Democrats have hidden mind control powers.

So, yes, while I normally, and in the absense of governmental misdeeds, would be all for letting AIG sink, frankly, I’m less than comfortable with the governmental equivalent to Otter saying to Flounder: “Flounder, face it, you screw up… you TRUSTED us”.

Still their responsibility to make sure that what they are putting their, or more accurately, their shareholder’s money in is sound.

When you had ordinary tract homes in the inland empire selling for $500,000 a few years ago, the handwritting was in neon on a billboard: bubble. They decided to stay in that market too long and now they are in trouble.

Accept responsibility and put away the begging bowl.
Dantheman

September 16, 2008 at 4:02 pm

I agree with Dave, we are going to need to bail out AIG due to the international holdings, as well as the fact that AIG’s default insurance is the piece which could make the whole Jenga game of a financial system fall down. If AIG goes down, then the securitized mortgage assets of many banks and sovereign wealth funds need to be reevaluated (very far downwards), and some banks, starting with Wachovia and Washington Mutual, will follow on its heels.

And since many of the sovereign wealth funds are also buying tens of billions of new debt from our government every week, the government is going to have to cave in to them. It’s an unfortunate price of spending half a trillion per year more than you take in, as we have done ever since Bush the Younger took office.
Bithead

September 16, 2008 at 4:04 pm

So, AIG goes under and with it their investors.

And what, pray, happens to those who mismanaged F&F, which in the end is the proximate cause of this?

Still their responsibility to make sure that what they are putting their, or more accurately, their shareholder’s money in is sound.

And are we really up for telling investors that the government can’t be trusted? Yeah, that’ll sell, huh? Or is it just easier to blame the private company?

See, there’s the issue; The government both as a whole and individual managers walk away with no blame at all, and we all get to point at how mismanaged the private comany was.

Forgive me, but somehow that doesn’t quite sit well.
Michael

September 16, 2008 at 4:18 pm

I agree with Dave, we are going to need to bail out AIG due to the international holdings, as well as the fact that AIG’s default insurance is the piece which could make the whole Jenga game of a financial system fall down.

That was my concern as well, if AIG goes away then there are a lot of investments in a lot of other institutions that no longer have that insurance safety net. Letting AIG fail will likely cause a significant reduction in the value of holdings at other large financial institutions. If the Fed doesn’t bail out AIG, they will at least have to find a way to prop-up the investments that were relying on AIG’s insurance.
Steve Verdon

September 16, 2008 at 4:21 pm

I agree with Dave, we are going to need to bail out AIG due to the international holdings, as well as the fact that AIG’s default insurance is the piece which could make the whole Jenga game of a financial system fall down. If AIG goes down, then the securitized mortgage assets of many banks and sovereign wealth funds need to be reevaluated (very far downwards), and some banks, starting with Wachovia and Washington Mutual, will follow on its heels.

In other words, prop up the house of cards so that we can repeat this debacle in another 5 to 10 years.

Brilliant!

Not.

Letting AIG fail will likely cause a significant reduction in the value of holdings at other large financial institutions.

In other words, these holdings aren’t worth what people think they are worth today. So we’ll :

1. Prop them up to continue the fiction.
2. ???
3. Profit!

Gee, the future looks bright, I gotta wear shades.
Anderson

September 16, 2008 at 4:31 pm

What is Steve Verdon’s opinion about the (NY) Bank of the United States? Good call there?

The New York Bank of United States was a bank in the Bronx, New York City which was founded in 1913. The institution had hundreds of thousands of depositors. While it survived the turmoil of Black Tuesday, it ended up collapsing and being unable to make whole on its deposits; it was one of the first large banks to collapse during the Great Depression.

In 1930 Wall Street refused to help a bank it could have saved. That touched off a wildfire of failure throughout the American banking system. The Bank of United States wasn’t well-run. Some of its managers later went to jail. But it was a very large bank, the fourth-largest depository bank in New York, with 450,000 depositors, most of them middle- and working-class Jews from the Garment District. That’s why it was known, sneeringly, as the “pants pressers’ bank.”

When the Bank of United States failed, on December 11th, 1930, the public panicked and the American banking system shuddered. People flocked to withdraw their money from other banks. In turn, the banks called in loans and sold assets in order to stay liquid. In that month alone, over 300 banks around the country failed.

(Eerily similar btw to the text of an NPR Marketplace commentator earlier this week … I’m not sure who’s copying whom.)
Steve Verdon

September 16, 2008 at 4:44 pm

In 1930 Wall Street refused to help a bank it could have saved. That touched off a wildfire of failure throughout the American banking system.

So did the Fed Anderson…so did the Fed. They could have acted as lender of last resort, but they didn’t. Instead government decided to stick to the gold standard for another 3 years or so prolonging the situation. But yeah, lets go with the government…their track record is soooo good.

By the way, Wall Street isn’t some single entity like the U.S. government. It is an aggregation of lots of people. Anthropomorphize much?
Bithead

September 16, 2008 at 6:22 pm

In other words, prop up the house of cards so that we can repeat this debacle in another 5 to 10 years.

The only way that’s going to happen is if government mismanages Freddie and Fannie again.

I grant you, that seems likely, but let’s correctly identify the problem, shall we?
anjin-san

September 16, 2008 at 6:36 pm

Brilliant!

Brillian? No. Necessary? Probably…
Steve Verdon

September 16, 2008 at 6:58 pm

Brillian? No. Necessary? Probably…

So…just to make sure, you advocate propping up the house of cards so that it can happen again and again?
anjin-san

September 16, 2008 at 7:00 pm

No, I advocate propping up the house of cards and then trying to figure out how to prevent it from happening again.
Bithead

September 16, 2008 at 8:29 pm

The problem is governmental involvement in the loan industry in the form of Fannie and Freddie, A holdover from the socialist meanderings of FDR and an expansion of same, the failure of which was accelerated by serious governmental mismanagement, to the point of malfeasance.

Government caused this problem. They should be the ones to pay to fix it. The people involved should be in jail, and then going forward, government should keep it’s hands off home loans.

Figuring out how to not allow it to happen again doesn’t involve more government but less.
Rick Almeida

September 16, 2008 at 8:46 pm

They should be the ones to pay to fix it.

They government pays for its mistakes with your money and mine.

It looks like your argument is that the government never should have been in the mortgage business in the first place, but since it was and it was mismanaged, the solution is to use more government money and power to re-buy the organizations.

Just to be clear, that’s your argument, right?
Bithead

September 16, 2008 at 8:57 pm

Just to be clear, that’s your argument, right?

My argument is the same as the kid dropping mom’s expensive vase… ‘You break it you fix it’.
Then, don’t presume to touch it again, lest the same thing happen.
Rick Almeida

September 16, 2008 at 9:43 pm

My argument is the same as the kid dropping mom’s expensive vase… ‘You break it you fix it’.

That’s a pretty flawed analogy. We bought the vase, gave it to a friend, watched said friend fill it with acid, stared aghast when the acid ate through the vase and into the friend and her family, and then bought what’s left of the vase back and somehow still plan to use it to hold flowers.

Even then, seems you discount entirely the fact that the executives of publicly-owned and traded Fannie Mae & Freddie Mac chose to load up on clearly flawed investment vehicles. I also haven’t seen much outrage from you that said executives managed to get out with multimillion-dollar payouts.

I guess the only cure for socialism is more socialism. Elephants all the way down!
Bithead

September 16, 2008 at 10:13 pm

We bought the vase, gave it to a friend, watched said friend fill it with acid, stared aghast when the acid ate through the vase and into the friend and her family, and then bought what’s left of the vase back and somehow still plan to use it to hold flowers.

Spare us the pretense that F&F were/are anything but a government entity.
Bithead

September 16, 2008 at 10:15 pm

Almost missed this.

I also haven’t seen much outrage from you that said executives managed to get out with multimillion-dollar payouts.

Apparently, you missed my comments on Gorelick, who I think I mentioned walked out with $26 million, at least a million of which came from a bonus she got by falsifying financial reports for the org.
Floyd

September 16, 2008 at 10:45 pm

Well the government just lent AIG $85million, if the reports are true tonight.
At least it was a loan and not an outright bailout like Katrina or 911.
Hope it works, Americans no longer have the character for bread lines and soup kitchens.
mike

September 16, 2008 at 11:20 pm

Act like they are capitalist with their CEOs, wages, bonuses and preach free market and when they are in trouble a good socialist approach will always do. can we get a real conservative or two in office to stop this nonsense.
Steve Verdon

September 17, 2008 at 12:23 pm

No, I advocate propping up the house of cards and then trying to figure out how to prevent it from happening again.

Sorry anjin-san a house of cards is always a house of cards. Letting it collapse (i.e. a correction) and then building something stronger and more resilient seems like a better strategy.
Michael

September 17, 2008 at 1:30 pm

Sorry anjin-san a house of cards is always a house of cards. Letting it collapse (i.e. a correction) and then building something stronger and more resilient seems like a better strategy.

It does seem like a better strategy, unless of course the house of cards is propping up something of actual value. In that case, you have to prop up the house of cards until you move that thing of value onto a more stable foundation, or risk losing the thing of value to spite the house of cards.
Floyd

September 17, 2008 at 2:06 pm

Sorry about the typo…. I meant “$85BILLION!”