September 17, 2008
In a dramatic move yesterday, the Fed bailed out floundering insurance giant AIG with a $85 billion loan (in return for an 80% public stake in the company), just hours after refusing to bail out securities firm, Lehman.
Many argue that rescuing AIG was the only way to avoid a global meltdown: "Its tentacles go further in to the avenues of business, as in mortgages, as in credit, as in hedge funds, as in countless ways that affect consumers, that affect drivers, that affect homeowners, affect passengers," said New York's Governor David Paterson.
There are others however, who disagree. According to McCain, bailing out AIG is nothing but a band-aid solution and tax payers should not be penalized for AIG's irresponsibility: "We need to set up a 9/11 Commission in order to get to the bottom of this and get it fixed and act to clean up this corruption," he said in an interview on CBS's 'Early Show.' "The government must make a commitment to the American people that we will fix this and it will never happen again."
Encouraging companies to believe they can be bailed out with tax payers money will only enhance risky behavior long-term, while not offering a solution to any of the underlying ills that plague the economy.
Writes David Leonhardt of the New York Times: "The Bush administration, the Fed and Congress, meanwhile, continue to focus on the immediate crises, with little attention to the underlying reasons that the economy has gotten into this mess — a stagnation of incomes, an explosion of debt and a decidedly outdated, and limp, approach to government oversight… At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem."
Comments | 10 Total
September 17, 2008 at 12:12pm by Rip Empson
In his article, Leonhardt goes on to draw a very relevant comparison between the Fed's bailout of Chrysler in '79 and the AIG takeover of today. When the Fed jumped in to save Chrysler during the oil crisis of the late '70s, it saved the company, but arguably, did very little to halt the decline of the domestic auto industry. Perhaps, Leonhardt holds, if the Fed had let Chrysler fall, it might have sent a wake-up call to Ford and GM. Maybe not. Of course, AIG with its $1 trillion balance sheet and operations in 130 countries was far too critical to international consumer finance to let plummet. Part of the reason Paulson and Bernanke drew a hard line in the sand with Lehman, but not with AIG. Sure, with an 80% control in the company and a policy that insists shareholders benefit little from the takeover, the Fed is still trying on tough love. But the problem obviously goes deeper than many care to admit. It's not that the Fed SHOULDN'T have bailed out AIG, it's that it NEEDS to make sure it fixes the deeper, underlying issues, rather than deal with company failures on an ad hoc basis. As the Economist suggests, "Perhaps it's time for the creation of a more formalized mechanism for dealing with the sick, akin to the Resolution Trust Corporation that took on bad assets from the savings and loan crisis of the 1980s..."
September 17, 2008 at 12:16pm by Douglas Paul
It's the classic catch 22 on the moral hazard issue. In a perfect world we could leave all these companies to feel the full weight of their actions so that and others that come after them will learn and never do this stuff again. Unfortunately doing so would create such chaos that in the end the harm caused would outweigh whatever lesson you are trying to teach.
In the end the government has to do these things but I like that they are picking their spots and are trying to get a return for their help. Now the important thing is that this leads to some new regulations that will actually keep this from happening again without removing the freedoms any company needs in order to operate in a free market society. Risk is good. No guts, no rewards but clearly some people simply can't take certain risks because of who they are and their position.
September 17, 2008 at 12:48pm by david wayne osedach
With nothing to lose there will definitely be increased risked taking.
September 17, 2008 at 1:16pm by Vance Dubberly
We don't need to set up a commission to get the the bottom of and we don't need to bail them out. We need to start start giving corporations the responsibilities that go along with the rights they sued for under the 14th Ammendment. AIG should not be bailed out. It's corporate charter should be revoked and it's assets auctioned off off to pay it's debtors. If corporations expect the privileges of real people they should accept the responsibilities as well. This upside down socialism crap has to stop. Yes it's going to disrupt financial markets, but financial markets have been so over inflated in the last 20 years it's just something we have to risk if we want anything that resembles stability in the future.
September 17, 2008 at 6:29pm by Heath Westover
There are certainly reasons to bailout AIG and reasons to let them feel the full brunt of the pain that they caused. If a company is bailed out then all executives should be ousted, without any "Golden Parachute" pay outs. The last thing we need to do is essentially reward executives for essentially taking on more risk then their company could absorb. As a small business owner I have to measure my risks, I could make decisions that would boost my income in the short run but if I ignore the long run then I deserve to have my income pulled out from underneath me.
Just say no to tax dollars going to overly aggressive executives that should be condemned and not rewarded for their behavior.
September 18, 2008 at 5:08am by Raymond Durrant
In the same way that sending the fire brigade to a burning house encourages carelessness with matches. The analogy is also relevant because putting a house fire out also protects neighbouring properties. A balance has to be struck between sending the right message out for the future and actually having a future...
September 18, 2008 at 9:43am by Mark Lauerman
It is time that American companies and Americans take responsibility. It is unfair that tax payers need to pay for this debacle. I would be curious to know how the executives are coming out of all this.
September 18, 2008 at 5:29pm by Stan Clauson
AIG is a major insurer in the bond markets. Their problem was one of liquidity, not risky investments. Proving assistance was essential in this instance. We need to be thoughtful about what we do--not dogmatic. That's why John McCain is such a risky investment for the future.
September 19, 2008 at 7:20am by Steve McGee
DUH!
Why did this problem happen in the first place? Because risk is mitigated by the tax-payer.
Now, a 9/11 commission report will only screw everything up and confuse the issue- I'm sure that's what Bush and McCain want (so does Obama, or he'd explain the mess clearly).
If interest rates are artificially low, it's because the fed policy extends too much credit (prints too much money and lowers the reserve rate).
So, you can buy a house for 10 x your annual income, with 10% down and 4% interest on a 750,000 loan!!!! Stand back for a little from this - you can see it's ridiculous.
I don't really blame the banks, they followed the law, just not prudence.
The fed (with no oversight from anyone) set a policy where prudence would mean shrinking of assets until your bank would need to start closing branches. Because it's possible to 'give away money' - and the banks were pressured to (how else can we tax at around 30%, throw it all away in wars, and expect the public to not revolt?).
Please vote your dead-beat congressman and Senator (yes, they're probably deadbeats - almost always they vote to increase the budget and size of government - and are the only ones who really have the responsibility for this).
We are all safe, we don't need more divisions of special police to protect us from every imaginable harm;
we are capable of spending money responsibly - if we are required to;
we don't really hate 'people' - only personifications of evil, and in the world there really are few individuals like that. When we flag wavers actually meet our 'enemies' face to face, we act like normal people and are polite. We don't actually hate anyone - why else would we need a draft?
September 19, 2008 at 7:23am by Steve McGee
Oh - by the way, since the tax-payers own 80% of the company, can we have a shareholders election, and scrutinize the severance pay of the executives? No - we can't. Because the FED owns the company, not us. WE don't own the Fed, have no authority over them.