The Feds' Bailout Black Hole

Bailouts Are Hard To End - One Reason Not to Start Them, Says Declan McCullagh

(CBS)  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.

"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.

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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 [e-mail]

[sjc_1]

I agree, we should stop throwing money into AIG to cover CDS bets, when we get nothing in return. AIG should be taken into Chapter 7 bankruptcy, broken up and sell the parts off to other insurance companies ASAP.

[inclaramaria]

Bailing out AIG as well as other Financial Institutions is throwing good money after bad. Let them fail. Break up AIG. Let the losing subsidiaries fail. The government should give the money to the banks that are still solid, even after the financial crash. Partner with these banks. Together you can buy off the assets of the financial companies in trouble. Make sure to also 'but' the good employees of the company in trouble. This is the only intelligent way of spending the billions. . . .

[sjc_1]

I like Jon Stewart's solution on the Daily Show..."just give the money to the people to pay off their credit cards and the banks get the money"

[sjc_1]

AIG is the CDS mess. They were writing insurance that is not insurance on bonds that are not bonds (CDOs). When they put money into AIG, it is to protect everyone that took out the CDS "insurance" on their CDO "bonds. This was a reckless scheme that could end up no where else but a crash.

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.

[johnbrown888]

The real bailout started back in the '90s under Clinton when the computer industry pushed for, and got, a deal that cut their labor costs dramatically.

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.

[hologram5]

First thing that needs to be done is do away with the federal reserve. These guys have nothing to do with the federal government, they charge us interest on the money that "WE" print and give to them. This is rediculous. They wont even tell us where "OUR" money went. Send them all to Gitmo. Start using US Notes instead of Reserve Notes. Print our own money, manage our own economy. That's a good start!!

[legacyabq]

SOME FORGOT TO TELL OBAMA THAT ANY COMPANY THAT RECEIVES BAILOUT FUNDS CANT SURVIVE...THEY ARE FAILED COMPANIES AND I WILL NOT TRUST THEM
--------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?

[whitemale08]

You can't bailout over a 1.4 quadrillion in worthless derivatives and credit-default swaps.

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.

[philabias]

SOME FORGOT TO TELL OBAMA THAT ANY COMPANY THAT RECEIVES BAILOUT FUNDS CANT SURVIVE...THEY ARE FAILED COMPANIES AND I WILL NOT TRUST THEM WITH MY MONEY AND APPERANTLY NEITHER WILL ANYONE ELSE.WHY?
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

[honesterik]

I think it's time to let all these companies that are to big to fail , fail. Then we can get back to many smaller companies that will be better managed and IF one of them fails the loss will not be so disruptive. The adjustment will be painful, but NOT nearly as bad as what we are about to go through. Most of the smaller companies will be better managed and all the now ,and soon to be, unemployed people will be working for the smaller better managed companies and most likely have better benefits and a lot less stress. The ammount of INTEREST we are paying on the national dept would pay for all the health care and education we would ever need, and keep all of our money at home and be able to lower our taxes too!

[honesterik]

Looking at the increasing debt and that there seems to be no end of the giveaway, maybe its time for another taxpayer revolt? Perhaps its time to have a large demonstration in Washington and other cities to let our representatives know exactly how we feel? We have a ever increasing number of unemployed and homeless people with a lot of time on there hands that could pull this off . Our news media does NOT seem to be getting threw to them (the news people still have their jobs and their homes).

[jntlw]

Let the lousy evil titans of Wall Street and the banks fail. They are failures in every sense of the word and I for one don't want one more dime given to prop up these zombies. I am for the stimuous package for the American people who many are victims (not all), but not a dime more for any company, bank, invesment firm, insurance company, hedgefund , or anything in the financial sector. Let them die the horrible death they and their CEOs so deserver!!! Shame and humiliation should be all they wear.

[perk235]

"It is better that AIG goes bankrupt and we have a horrible two or three years than that the whole U.S. goes bankrupt."
Jim Rogers, Quantum Fund
-------------------------------------

At some point the government is going to have to choose to save itself. It can't pay for the $160 trillion dollars in derivatives that the incompetent cowboys of the financial industry made.

[payasyougo]

Spend one billion and create about four hundred special streamlined bankruptsy processing centers between CA, FL, NV and AZ and spend the next 60 days fixing the problem so the remaining 93% of the country can move on.

Or, keep throwing money into the black hole and then pass a bunch of unrelated pork spending and continue to watch the problem spread so everyone feels the pain of those 5-7% of the population that lived beyond their means.

[tincup356]

it will just be a matter of time before the dollar is worthless,,,and when our government has to tell the people it will not be pretty.......they better start posting barricades better than they have around capitol hill... they wont stop millions of mad broke former middle class citizens who have been robbed of their past fruits of labor or their dreams......congress has forgotten we fought the first revolution over TAXATION WITHOUT REPRESENTATION,,,,,,funny how history repeats itself. It is just a matter of time,,,and that grows shorter all the time, as the numbers of affected Americans grows.

[stevador39]

Jail Henry Paulson, Ben Benanke and Tim Geithner along with their Wall Street buddies.

[sharednotion]

Maybe the federal government should give less emphasis to repeatedly helping large institutions that are limping along, and finally give a really HUGE $-in-your pocket stimulus to households, squeezed into a rather compact span time (such as over 3 months starting as soon as possible, ZERO tax withholding on households' paychecks (INCLUDING no state income tax --the federal gov. could make up the loss to those states during that period), and INCREASING cash benefits during those three months (such as Social Security, SSI, veterans' benefits, and unemployment benefits). Altho households would use SOME of that for savings & to pay debt, a GREAT amount of it would be SPENT. (Once the economy is moving again, then the very institutions the feds are trying to bail out would also exprience some improvement in an improved economy.

[afmcalax]

Although I understand the need for the bailouts, the execution of the plan has been horrendous for the American tax-payer. Both Democrats and Republicans rant at the lack of accountability, but then do nothing. It looks good on TV but the bottom line is nothing changes. Wall Street and the bankers still believe they are a protected class that assumes no responsibolity thus has to pay no penalty. What should be happening is that most of the senior management in these firms should be replaced, without golden parachutes, and never allowed to work within the financial industry again. They are really criminals, but are not being treated that way. They have too many friends in D.C. that will cover up and make excuses. I will guarantee that for the rich the recession will be short and limited; but for the rest of us it will be long and painful. Regular Americans have been abandoned by our political and economic system.

[creeper00]

"It's not just AIG, of course."

No, it's not. But AIG seems to have an unlimited capacity for requesting and receiving our money. All they have to do is ask and they get it.

Why?

[platteman]

The MSM was so enamorned with the fact that all business was too big to fail that they never asked the hard questions!!! Most if not all the pundets and economists said, don't bail them out, yet a few in congress, thanks to the large contributions to their election camaigns and free trips said, we can't let that happen. We won't be able to fly around and be treated like kings and queens. Thus, the bail out began, we saw it didn't do any good, congress then stepped up again, we saw that too didn't work, and so on and so on. Then the MSM still slobering with is love affair with BHO, never chose to ask any hard questions and we get a porkoloplus bill, then a massive spending bill, now almost a 4 trillion dollar budget. We could have given ever person in the USA nearly 10 grand and been better off. What a bunch of dolts. That is what happens when people who have never run anything and vote present. We got a Handout in Chief.