The Feds' Bailout Black Hole
If it wasn't already obvious, this week's $30 billion check that the U.S. Treasury handed to insurer American International Group should demonstrate the folly of propping up crippled companies.
This is the fourth bailout to AIG, which already has put over $170 billion in government funds at risk, and it won't be the last. AIG lost $62 billion in the last three months of 2008.
Call it the Feds' Bailout Black Hole. Once taxpayer funds cross its event horizon, they seem to disappear forever.
It's not just AIG, of course. General Motors has received $13.4 billion from the Feds so far, and said last month that it will need another $16.6 billion.
That request will almost certainly be granted, even though GM reported last week that it lost $31 billion in 2008, or $3,700 on every vehicle sold. With sales off a stunning 53 percent from a year before, and a gale-force economic storm building, expect GM executives to show up in Washington to request a third or fourth or fifth round as well.
Let's not forget Fannie Mae and Freddie Mac, created with an explicit guarantee that zero taxpayer dollars would be used to bail them out. The law in question says: "This chapter may not be construed as obligating the federal government, either directly or indirectly, to provide any funds... or to honor, reimburse, or otherwise guarantee any obligation or liability..."
Well, we know how that turned out. After an era in which Fannie and Freddie were headed by Democratic insiders who walked away with tens of millions of dollars amidst accounting scandals, the two companies have been taken over at taxpayer expense. (Their influence, by the way, was bipartisan: Freddie wrote a $250,000 check to last year's Republican convention.)
Now we have the spectacle of the Treasury handing Fannie and Freddie a $400 billion bailout in the form of stock and debt guarantees. But Fannie is losing money quickly -- around $59 billion last year -- and it already has said it needs another $35 billion in additional aid.
The problem with dubbing a company "too big to fail" is that it becomes big to turn down when it asks for more. The usual incentives for managers to keep costs under control fade when an enterprise becomes a ward of the state. A focus on pleasing customers gives way to a focus on pleasing politicians in Washington.
Poorly-managed businesses survive at taxpayer's expense, while their better-managed rivals struggle through a shrinking economy and worry about what happens now that regulators own their competitor. A new risk-taking incentive emerges: If you're going to fail, make sure you fail so magnificently, so stupendously, that you get bailed out too.
Bankruptcy is an alternative to this bailout black hole. Contrary to popular belief, bankruptcy actually protects a company by placing creditors' claims on hold and allowing a firm to continue to operate. (Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric might be surprised to learn those companies once filed for Chapter 11.)
A bankruptcy judge could have carved AIG up into chunks with sound components separated from unsound ones. Other companies would buy assets that had value. Shareholders would likely have emerged in better shape than they have after AIG's stock price fell from over $70 to 43 cents in a two-year period.
One aspect of the repeated AIG bailouts that deserves additional public scrutiny is how they enriched some of the company's counterparties at taxpayer's expense.
Those are the bailout's indirect beneficiaries, and they reportedly include Goldman Sachs, Merrill Lynch, UBS AG, and Deutsche Bank AG. They knew there were risks to dealing with AIG; the financial world would not end if AIG defaulted. (As George Mason University economics professor Tyler Cowen put it this week: "No one wants to say it, but essentially the Fed has been bailing out European banks.")
If the U.S. Congress had been asked last fall to hand over $170 billion -- enough to fund NASA for a decade -- to bail out Goldman Sachs and European banks, does anyone think this would have been approved without question? But because Congress has abdicated its constitutional responsibility, we're left with the sad spectacle of senators including Ron Wyden (D-Oregon) unsuccessfully pleading with Fed Chairman Ben Bernanke to reveal the identities of the recipients of this largesse.
There is some reason for hope. A recent CBS News/New York Times poll suggests that only 39 percent of Americans approve of bailing out banks and financial institutions, down from 46 percent in December.
Americans seem to be realizing how flimsy the justification for Wall Street bailouts was. The Federal Reserve announced the AIG bailout by saying that without it, the nation would experience "reduced household wealth and materially weaker economic performance." Yet even with the bailout, as a 42 percent decline in stocks since September shows, we've experienced precisely that.
Declan McCullagh is the chief political correspondent for CNET. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is declan.mccullagh@cnet.com
Copyright 2009 CBS. All rights reserved. This is the fourth bailout to AIG, which already has put over $170 billion in government funds at risk, and it won't be the last. AIG lost $62 billion in the last three months of 2008.
Call it the Feds' Bailout Black Hole. Once taxpayer funds cross its event horizon, they seem to disappear forever.
It's not just AIG, of course. General Motors has received $13.4 billion from the Feds so far, and said last month that it will need another $16.6 billion.
That request will almost certainly be granted, even though GM reported last week that it lost $31 billion in 2008, or $3,700 on every vehicle sold. With sales off a stunning 53 percent from a year before, and a gale-force economic storm building, expect GM executives to show up in Washington to request a third or fourth or fifth round as well.
Let's not forget Fannie Mae and Freddie Mac, created with an explicit guarantee that zero taxpayer dollars would be used to bail them out. The law in question says: "This chapter may not be construed as obligating the federal government, either directly or indirectly, to provide any funds... or to honor, reimburse, or otherwise guarantee any obligation or liability..."
Well, we know how that turned out. After an era in which Fannie and Freddie were headed by Democratic insiders who walked away with tens of millions of dollars amidst accounting scandals, the two companies have been taken over at taxpayer expense. (Their influence, by the way, was bipartisan: Freddie wrote a $250,000 check to last year's Republican convention.)
Now we have the spectacle of the Treasury handing Fannie and Freddie a $400 billion bailout in the form of stock and debt guarantees. But Fannie is losing money quickly -- around $59 billion last year -- and it already has said it needs another $35 billion in additional aid.
The problem with dubbing a company "too big to fail" is that it becomes big to turn down when it asks for more. The usual incentives for managers to keep costs under control fade when an enterprise becomes a ward of the state. A focus on pleasing customers gives way to a focus on pleasing politicians in Washington.
Poorly-managed businesses survive at taxpayer's expense, while their better-managed rivals struggle through a shrinking economy and worry about what happens now that regulators own their competitor. A new risk-taking incentive emerges: If you're going to fail, make sure you fail so magnificently, so stupendously, that you get bailed out too.
Bankruptcy is an alternative to this bailout black hole. Contrary to popular belief, bankruptcy actually protects a company by placing creditors' claims on hold and allowing a firm to continue to operate. (Many current customers of United Airlines, Texaco, Global Crossing, and Pacific Gas and Electric might be surprised to learn those companies once filed for Chapter 11.)
A bankruptcy judge could have carved AIG up into chunks with sound components separated from unsound ones. Other companies would buy assets that had value. Shareholders would likely have emerged in better shape than they have after AIG's stock price fell from over $70 to 43 cents in a two-year period.
"Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole US goes bankrupt," legendary investor Jim Rogers, who co-founded the Quantum Fund with George Soros, told CNBC on Tuesday. "AIG has trillions of dollars of obligations, let them fail, let the courts sort it out and start over. Otherwise we'll never start over."
One aspect of the repeated AIG bailouts that deserves additional public scrutiny is how they enriched some of the company's counterparties at taxpayer's expense.
Those are the bailout's indirect beneficiaries, and they reportedly include Goldman Sachs, Merrill Lynch, UBS AG, and Deutsche Bank AG. They knew there were risks to dealing with AIG; the financial world would not end if AIG defaulted. (As George Mason University economics professor Tyler Cowen put it this week: "No one wants to say it, but essentially the Fed has been bailing out European banks.")
If the U.S. Congress had been asked last fall to hand over $170 billion -- enough to fund NASA for a decade -- to bail out Goldman Sachs and European banks, does anyone think this would have been approved without question? But because Congress has abdicated its constitutional responsibility, we're left with the sad spectacle of senators including Ron Wyden (D-Oregon) unsuccessfully pleading with Fed Chairman Ben Bernanke to reveal the identities of the recipients of this largesse.
There is some reason for hope. A recent CBS News/New York Times poll suggests that only 39 percent of Americans approve of bailing out banks and financial institutions, down from 46 percent in December.
Americans seem to be realizing how flimsy the justification for Wall Street bailouts was. The Federal Reserve announced the AIG bailout by saying that without it, the nation would experience "reduced household wealth and materially weaker economic performance." Yet even with the bailout, as a 42 percent decline in stocks since September shows, we've experienced precisely that.
Declan McCullagh is the chief political correspondent for CNET. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is declan.mccullagh@cnet.com
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AIG is so big, that letting it fail would mess up the bond and pension sectors. An insurance company has a hard time going bankrupt, because most of their assets are securing future possible policy payoffs. There are reserve requirements for a good reason.
What they have to do is get the banks to see the non performing loans at present market value and not let them pretend that those loans are going to be sold at previous inflated market prices. Once they can do that, the pressure will be off of the CDS mess and we can stop shoveling money into AIG, which is just a clearing house for the overall mess right now.
They got federal approval to import hundreds of thousands of Asians to work in the computer industry in the US.
But they paid more than just money.
They paid off the Asians with America's scientific future, so a handful of rich geeks like Larry Ellison could buy another yacht.
All while turning America from a scientific leader into a burger-flipper service economy.
--------philabias
Huh??
The bailout and TARP fund was started by Bush and Paulson several months before the election..
Obama had nothing to do with it..
Bad memory huh?
I tried to tell you guys that the British are the 'counter-parties' behin all of this.
Gordon Brown earlier last year had Wall Street Republican Hank the Snake Paulson and Ben Bernanke bailout British Banks namely JP Morgan Chase with TARP money.
AIG is a bottomless pit and they know it!
...and yet British PM Gordon Brown addressed Congress at the invitation of globalists Nanci Pelosi to tout his 'global grand bargain' which does nothing to help mankind but revert him back to the stone age by converting worthless credit-default swaps into 'carbon credits'.
That way we will all eat our own sewage and deficate in the grass like some beast so the international bankers can 'swap' the difference from the lack of consumption and turn it into a worthless derivative to keep the 3rd world under-developed and in debt.
Thanks President Obama for returing that worthless bust of Winston Churchill.
Churchill and the British have always wanted to use the 'special relationship' to once again subjegate the United States back into the British Commonwealth now known as 'globlaization', and reduce our population to a remnant species of human/animal hybrid of serfs and gargoils to worship their so-called royalty.
BECAUSEMTHEY FAILED THEN GAVE OUT BONUSES FOR FAILING . NOT MY MONEY NO WAY...FAILED MEANS FAILED
NO MATTER HOW MUCH MONEY YOU THROUGH DOWN THE OBAMA HOLE