Somebody Stop The "Bailout Party"
It's reasonable to be outraged at the seven-figure bonuses that some of AIG's top earners received, courtesy of taxpayers. But save some ire for the government officials who let this situation develop in the first place.
We're starting to see more evidence that last September's government bailout of AIG was, contrary to what our esteemed leaders in Washington have been telling us, not exactly necessary.
Lucian Bebchuk, a Harvard professor of law, economics, and finance, wrote last week that claims of catastrophe if AIG filed for bankruptcy protection were "exaggerated." Larry Ribstein, who teaches business law at the University of Illinois, has gone further and argued that not only is an AIG bankruptcy possible, it's necessary to preserve what remains of the U.S. financial system.
Another bit of data that recently became public is a partial list of AIG's counterparties - including Goldman Sachs, Bank of America, and European financial institutions. Why can't those companies take "haircuts" and accept some losses? Instead, U.S. taxpayers are being forced to bankroll this effort to the tune of over $170 billion, so far, even as their own 401(k)s shrink and home values slide.
Unfortunately, the collective temperament of most Washington politicians - call them the Bailout Party, a term that includes Democrats and Republicans - includes a fondness for crony capitalism that dates back to the 1998 bailout of the hedge fund called Long-Term Capital Management. Not only is AIG likely to receive more handouts from the U.S. Treasury, but so are other firms that have yet to fail.
The best answer is to halt the rush toward bailouts. The second-best is to take the decision out of the hands of one or two individuals (Henry Paulson, Timothy Geithner, Ben Bernanke) and turn it over to the democratic process in the form of the U.S. Congress, which the almost-forgotten Constitution makes responsible for appropriating funds.
If that isn't politically feasible, there's one more option: prevent companies in the financial sector from becoming too big to fail. Keep them small enough to fail.
This is, admittedly, an unsavory choice. Although antitrust law might be one way to accomplish that objective, it brings with it a legion of other problems. Dominick Armentano, a research fellow at the Independent Institute and a professor emeritus at the University of Hartford, argues: "The weight of the general evidence is that the firms indicted under the antitrust laws were not abusing consumers, and that the laws have tended, instead, to protect competitors and reduce efficiency throughout the market."
On the other hand, modern antitrust law grew out of a belief that a check on "irresponsible" corporations was necessary. Worries about monopolistic behavior by railroads and Standard Oil Company are what, in large part, led to the creation of the Interstate Commerce Commission and the enactment of the Sherman Act. (If the word "irresponsible" doesn't describe AIG, I'm not sure what does.)
Another method would be to limit the dollar value of bets that a company like AIG can enter into. AIG was brought down by its exposure to credit default swaps - the total global market as of last fall was around $62 trillion - that allowed it to bet with other firms about whether a third party would default on debt.
If AIG's exposure to these bets was curbed, then it would have been likely to remain small enough to let fail. Bloomberg News estimated last fall that AIG provided $441 billion in backing for Wall Street trades involving credit default swaps; some fraction of that could be an upper bound.
All of these suggestions suffer from problems, including limiting what responsible firms can do because others will be less responsible, and a future administration could always declare that a set of smaller firms have collectively made bad bets and must be propped up for one reason or another.
But what they would do is reduce the ability of private firms to engage in what has come to resemble legalized extortion - the practice of telling regulators that if they don't cough up cash, catastrophe will ensue. The Washington Post has uncovered a secret AIG presentation to government officials that warned of a "chain reaction of enormous proportion" involving "a cascading set of further failures."
The consequences of these repeated bailouts are immense and historic. As of last month, the U.S. government has risked $9.7 trillion on bailouts, not counting the Treasury Department's new toxic asset-buying plan. To put that in perspective, the IRS collects only $1.36 trillion a year in individual income tax revenue.
Given a choice between a free market and where firms are constrained in size, I'll take the free market. But thanks to the Bailout Party, that's no longer an option, and may not be again for quite a while. Ed. Note: Declan McCullagh will be on vacation for the next two weeks.
I encourage you to bookmark the home page for my Other People's Money column. An RSS feed is available too. If you have questions, feedback, or other suggestions, please feel free to e-mail me at declan.mccullagh@cnet.com.
Declan McCullagh is the chief political correspondent for CNET and an EconWatch contributor. 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 with his wife in the San Francisco Bay area.
By Declan McCullagh
Copyright 2009 CBS. All rights reserved. We're starting to see more evidence that last September's government bailout of AIG was, contrary to what our esteemed leaders in Washington have been telling us, not exactly necessary.
Lucian Bebchuk, a Harvard professor of law, economics, and finance, wrote last week that claims of catastrophe if AIG filed for bankruptcy protection were "exaggerated." Larry Ribstein, who teaches business law at the University of Illinois, has gone further and argued that not only is an AIG bankruptcy possible, it's necessary to preserve what remains of the U.S. financial system.
Another bit of data that recently became public is a partial list of AIG's counterparties - including Goldman Sachs, Bank of America, and European financial institutions. Why can't those companies take "haircuts" and accept some losses? Instead, U.S. taxpayers are being forced to bankroll this effort to the tune of over $170 billion, so far, even as their own 401(k)s shrink and home values slide.
Unfortunately, the collective temperament of most Washington politicians - call them the Bailout Party, a term that includes Democrats and Republicans - includes a fondness for crony capitalism that dates back to the 1998 bailout of the hedge fund called Long-Term Capital Management. Not only is AIG likely to receive more handouts from the U.S. Treasury, but so are other firms that have yet to fail.
The best answer is to halt the rush toward bailouts. The second-best is to take the decision out of the hands of one or two individuals (Henry Paulson, Timothy Geithner, Ben Bernanke) and turn it over to the democratic process in the form of the U.S. Congress, which the almost-forgotten Constitution makes responsible for appropriating funds.
If that isn't politically feasible, there's one more option: prevent companies in the financial sector from becoming too big to fail. Keep them small enough to fail.
This is, admittedly, an unsavory choice. Although antitrust law might be one way to accomplish that objective, it brings with it a legion of other problems. Dominick Armentano, a research fellow at the Independent Institute and a professor emeritus at the University of Hartford, argues: "The weight of the general evidence is that the firms indicted under the antitrust laws were not abusing consumers, and that the laws have tended, instead, to protect competitors and reduce efficiency throughout the market."
On the other hand, modern antitrust law grew out of a belief that a check on "irresponsible" corporations was necessary. Worries about monopolistic behavior by railroads and Standard Oil Company are what, in large part, led to the creation of the Interstate Commerce Commission and the enactment of the Sherman Act. (If the word "irresponsible" doesn't describe AIG, I'm not sure what does.)
Another method would be to limit the dollar value of bets that a company like AIG can enter into. AIG was brought down by its exposure to credit default swaps - the total global market as of last fall was around $62 trillion - that allowed it to bet with other firms about whether a third party would default on debt.
If AIG's exposure to these bets was curbed, then it would have been likely to remain small enough to let fail. Bloomberg News estimated last fall that AIG provided $441 billion in backing for Wall Street trades involving credit default swaps; some fraction of that could be an upper bound.
All of these suggestions suffer from problems, including limiting what responsible firms can do because others will be less responsible, and a future administration could always declare that a set of smaller firms have collectively made bad bets and must be propped up for one reason or another.
But what they would do is reduce the ability of private firms to engage in what has come to resemble legalized extortion - the practice of telling regulators that if they don't cough up cash, catastrophe will ensue. The Washington Post has uncovered a secret AIG presentation to government officials that warned of a "chain reaction of enormous proportion" involving "a cascading set of further failures."
The consequences of these repeated bailouts are immense and historic. As of last month, the U.S. government has risked $9.7 trillion on bailouts, not counting the Treasury Department's new toxic asset-buying plan. To put that in perspective, the IRS collects only $1.36 trillion a year in individual income tax revenue.
Given a choice between a free market and where firms are constrained in size, I'll take the free market. But thanks to the Bailout Party, that's no longer an option, and may not be again for quite a while. Ed. Note: Declan McCullagh will be on vacation for the next two weeks.
I encourage you to bookmark the home page for my Other People's Money column. An RSS feed is available too. If you have questions, feedback, or other suggestions, please feel free to e-mail me at declan.mccullagh@cnet.com.
Declan McCullagh is the chief political correspondent for CNET and an EconWatch contributor. 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 with his wife in the San Francisco Bay area.
By Declan McCullagh
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Mr President (Barak)......................many people are disagreeing with your actions to the executives and corporate company's but I have to state keep up the good strong persistance in holding these individuals accountable even if their are contracts, your doing the right thing in this matter .
I'm GOP as well !
If the rich made major contributions to society, they deserve a reward. If they got rich by lying, cheating and stealing from hard working people, they do not. We as a people decide who has made a major contribution to society.
http://www.gsereport.com/2000/April8-May5.pdf
This is how the report begins:
"May 5, 2000
The GSE REPORT ?
Contents of GSE Report ?
?Combined Fannie, Freddie, and the FHLBanks have $2.6 trillion ? T as in trillion ? of outstanding debt?I can?t
explain why the amount of outstanding debt is so huge. I would think that $2.6 trillion would be enough to provide
every man, woman and child in the US who doesn?t own a home with the equivalent of a custom-designed palace on
two acres in the Hamptons.? (Dow Jones Newswire, Jim Murphy, 4/12/00)
?Fannie Mae and Freddie Mac, the largest S&L?s the world has ever seen, want to have it all. They?re beyond the
reach of Congress and the voters. As for further expansion, you ain?t seen nothing yet.? (International Economy,
Peter Wallison, March/April 2000)" -? 2000 by Canfield & Associates
A must read for all Americans...we dropped the ball by not paying attention back then.
Sweden - the supposed model for this system - has unemployment over 15% with most of those unemployed on a government paid "medical leave" - mostly for stress. I worked for a Swedish company and went there many times. It is horribly expensive to live there and there is no upward mobility.
Anybody who can believe that the Government is better suited to manage the wealth of a nation than the people of that nation is disillusion. For those who love to throw the Fascists name around - look back in history. Fascists love nationalizing industry and central control of the economy. How do you think the Nazi's took control to make the huge war machine? They took over industry and ran business.
Isn't that what the current administration is in the process of doing? That frightens me. That much power in the hands of a few who feel above us, the law and the common person? I will take an economic system run by people rather than government even if it means occasional economic upheaval, The alternative creates an opportunity for dictators - can you say Hugo Chavez?
What a crock.
When you have been downsized and outsourced for 30 years, this is the result. People listened to Reagan say that manufacturing jobs would be replaced by "service sector" jobs. They never told you that meant flipping burgers at a fast food outlet for minimum wage.
Now that America has been Walmartized...we can all wonder if we will have enough money to even shop at Walmart in the future. Corporations have gotten all the breaks since the 1970s because they convinced everyone that they create the jobs. They eliminate jobs because that cuts into dwindling profits. It has been a race to the bottom and are all getting there except the rich. They have enough to ride out a 10 year Depression, the working person can not and they know that...this consolidates power.
I am a little worried about the fact that those of us who chose wiser paths are unable to benefit from all this free money going around. But it is only perceived as free if you are stupid. Also; are we promoting stupidity as an American cultural characteristic?
I have a question that is a little down a bunny path. If we have been outsourcing to China all these years and building up their coffers are we now borrowing back the same money that could have been in our own coffers?
I forsee the next president as paying a monthly rent check to property investors in China.
Posted by titans58 at 7:21 AM : Mar 26, 2009
You sound mad and I do not blame you. Our government is becoming too large. The constitution does limit government but congress seems to want to trample on it. As americans many, many are spoiled. Banks and home buyers are to blame for giving loans that people can't afford and the home buyer signs the contract and crosses thier fingers.. I also bought a average sized house because I am an average american. I earn in the upper middle class range but that does'nt mean that I should spend that way. A good lesson I learned from my grand ma was save for a rainy day and I started saving when I got my first job at 15, I have saved and spent thriftly for 32 years and it paid off, I just wish the americans that got in over thier heads would have planned for a rainy day...actually for the c-rapstorm that is hitting the nation right now.