That depends on whether you want AIG to survive as a going concern or whether you are liquidating it. By forcing it to break its insurance contracts with the trading partners, you would in effect be slitting its throat. As to whether that would be better, I can’t really say because I’m not that savvy in exotic financial instruments but at least someone said AIG “was too big to fail”. This is how I understand the situation:
If AIG is the major player in the investment insurance game, then perhaps it is too big to fail. In other words, if AIG goes, the willingness of trading partners to purchase U.S. financial instruments may significantly lessen. If it lessens, then banks and other financial organizations will have less market for their riskier instruments and must alter their current operating rules on liquidity and risk in the first place, which means less money to loan out to businesses and individuals. This, in turn, means stagnation at every level of the economy. In other words, the whole system is a house of cards threatening to collapse at any point.
Now, it is easy to point at AIG and other financial instrument marketers to say they took too many risks in the first place. Perhaps. But you have to go back to political correctness, affirmative action and Clinton to see how its insistence that every person be given a loan, regardless of how creditworthy, created an intolerable lack of security and income for the banks forced into making these loans. Financial institutions came to the banks’ rescue by bundling lots of loans—some good, some bad—into negotiable paper which could be sold to other investors and thus restore banks’ liquidity. The problem was when the investors went to purchase the negotiable instruments, they had no way of investigating the level of risk they were undertaking because the loans and their probability of default were no longer traceable due to the bundling. Thus, before agreeing to purchase these instruments, the investors wanted some type of insurance on their risk. This is where I think AIG came in. It was to cover losses by those defaults as they trickled in over the years.
Now go back to last summer when gas prices, loud-mouthed politicians and other factors touched off a slew of defaults and threats of defaults. What was supposed to be a slow, steady stream of defaults became a torrent and as the strain grew on AIG and others, the investors began getting nervous. The market fell for these bundled mortgages and banks got strained. Insurance companies make their money by assessing the normal risks of whatever they are insuring and maintain enough liquidity to handle those normal risks. The run on AIG was far beyond normal.
So now AIG gets bailout money and it pays its insurance contract liabilities to the big banks. Why? There may be some nepotism there but I also suspect it is because these are the big buyers of risky U.S. instruments and if that market completely collapses, so does our economy. Government should at this point find a way to get rid of the community reinvestment act (which forces banks to loan money to unacceptable risks) and other things which defy natural economic rules and ease everyone back to the real world. But that is not what the Obama Administration is doing. If anything, it is further eroding confidence in U.S. debt instruments by fueling inflation and pushing even more regulation to benefit bad risks.
So, while you are right to be angry, I’m not sure either AIG or its trading partners are the proper target. Sure, there was a lot of money made there and it seems like the fatcats are getting away with it again, but if the fatcats go away and invest in, say, China or Russian or Singapore, you and I are in a world of hurt far beyond this bailout. The liquidity simply won’t be there for cars, mortgages, capital improvements, business expansion, education grants, and people won’t be able to buy our homes at even the price we paid for them, let alone a profit. It isn’t fair but once the government started distorting the credit market, it was all pretty predictable.
One of the problems with a notion of American exceptionalism is that it often goes beyond the idea that we have a destiny as a city on a hill. Some believe that we don’t have to follow normal rules in economy and that we can, by virtue of our exceptionalism, try the same idiotic socialist tactics that have sunk other countries without failing ourselves. We deal a lot in fantasies nowadays: Look at American Idol, at legal fictions like two daddies, unborn baby not human, men and women identical and so forth. We as a society are divorcing ourselves from reality and American economics is no different.
Now I’m sure I have not adequately stated the situation. As I wrote above, I’m no financial expert but it seems to me that the problems are so systemic that no one party or groups of parties to this house of cards bears the full blame. We certainly should resist demonizing a middleman, especially if that middleman is vital to our continued viability as a nation. We can start by demanding Congress get itself out of the social engineering by financial fiat business. The people thinking up these social engineering ideas are the ones getting caught now cheating on their taxes, abusing privileges, lying through their teeth, and pointing fingers at anyone but themselves. Most businesses don’t trust incompetents to handle their finances and we taxpayers need to do the same. We need to find ways to get Congress out of the business of micromanaging the country, of meddling everywhere and of confiscating taxpayer funds to further their personal agenda instead of the nation’s. I’m hoping we can do this without calling a Constitutional Cenvention but even that may be necessary to rein in this profligate Congress with our all-too-willing president. We need to sue and sue again to define Congressional authority. We need to find ways to impose term limits on those professional politicians who brought us this mess. We need to find ways to make Congressmen and Senators answerable to the nation as a whole rather than to their specific constituents. The political system is broken right now because the Founding Fathers envisioned an educated, honorable electorate choosing its best people from among them to hold office for a limited period while taking a break from their “real careers”. We have strayed so far from that standard that the trust given to Congress is no longer warranted. Now we have elections of media creatures fueled by millions of special interest dollars with little or no accountability to the people as a whole.
What can we do to control this behemoth? A lot probably. We can hold politicians’ feet to the fire. We can use the internet to expose hypocrisy and corruption. The President is writing a book for kids. We can write books for kids. We can counter bad education with good education at home and in the public fora. We can stop being cowed into silence by the liberal furies. We can speak of our faith in the country, its people and God at every opportunity we can. We can, perhaps, hold hearings in the form of forums or panel discussions on the behavior of our politicians. We can write letters to the editor, have our own pithy bumper stickers which teach more than insult. We can educate ourselves about the values that make this country work. We can find and fund true conservative voices willing to speak out and create organizations to help them move further to the right like MoveOn.org is doing to move Dems to the left. There’s lot to do and it will take a long time but it might come faster as more Dem chickens come home to roost and we help the public see they are Dem chickens. The next election isn’t far away and we can help people see the Dem complicity in all this between now and then.
Okay, rant off. I must get a little more sleep before the usual Saturday marathon begins or this normally sane person might blow a fuse. Sitting on my desk here at home right now is a WW2 Japanese bomb detonator. My nerdy husband found it this week at a secondhand electronics joint and thought it would make a nice decoration or paperweight. I’m going to use it to help remind me that getting mad and blowing up isn’t very constructive. ;o)
"Too big to fail" means that small investors and taxpayers fail. I personally will never again buy any stock, because Warren Buffet is going to win and I am going to lose, thanks to "our" government.
People who own small businesses won't be bailed out. If they fail, they fail. Knowing that the casino is crooked, who wants to play?
Does anybody really know where all the AIG money goes?
Maybe they are too big to fail and maybe they aren’t. More and more these bailout look like one big scam to get more billions more dollars into the hands of those who created this mess. And I don’t mean bonuses. They are a small part
My bet is their failure will not drag down the financial system. If you asked me two months ago I thought the opposite.
Goldman gets 10 billion more dollars for free. Warren Buffet lent them 10 billion at high interest rate for ten years. But the AIG money that Goldman got was FREE MONEY from you and me and the taxpayers and our grandchildren who will be saddled with these mega-debts!
You (taxpayers) are not bailing out AIG. You are bailing the uber wealthy scum of Wall Street and European banks who loaded up on AIG credit default swaps......
Which contrary to what you wrote have very little to do with foolish government policies except that derivatives need to be regulated and traded in transparent markets