Tuesday, March 03, 2009

Bankers as Arsonists

March 3, 2009, 6:30 a.m.

No More For AIG
and the View from the "Frontline"

(brought to you by FromDC2Iowa.blogspot.com*)


I dreamed I was having a beer with Tim Geithner and Ben Bernanke. (I had to explain to them that we were fresh out of champagne.)

"So what do you think is the answer for AIG?" I asked.

"We think handing over billions of taxpayers' dollars to the company is the way to go," Geithner said. Bernanke nodded, while looking suspiciously at his glass of beer.

"Have you tried that?" I asked.

"Oh, yes." Bernanke smiled. "Three times. I think we're up to about $150 billion now, aren't we Tim?"

"Yeah, about that." Geithner took a sip and scowled.

"So how's that been working for you?" I asked.

They both looked down and said nothing.

"How's that been working for you?" I repeated.

"Not really all that well," Geithner finally replied in a near whisper. "They lost another $60 billion this last quarter, and the Dow just dropped below 7000."

"Oh, my." I paused. "So what are you going to do now?"

They both smiled and said, as if in chorus, "We thought we'd give them another $30 billion."

What the hell is the Obama Administration and Fed thinking to give AIG another $30 billion of our (taxpayers') money?! When you find something that doesn't work, repeating it over and over in the hopes that it will is one definition of insanity. This means we've now underwritten a single company to the tune of what will soon be a quarter of a trillion dollars -- two and a half times the entire federal budget when I was in government!

AIG, this so-called "insurance company," just reported a $61 billion dollar loss during the last three months! That's nearly $1 billion every business day. Andrew Ross Sorkin and Mary Williams, Walsh, "A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid," New York Times, March 3, 2009 ("the deal . . . presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises").

Stories like that always kind of make me wonder. If you were paying even a modicum of attention wouldn't you kind of notice after a day or two that there was $2 billion missing from the petty cash drawer?

These are the guys, you'll recall, who celebrated one of our early infusions of billions by heading off to a luxury resort to spend some of it.

And let's get straight why these losses are occurring.

Bankers, through greed or ignorance, were issuing mortgages they knew, or should have suspected, would not be paid ("sub-prime mortgages"). So long as they could mix them up, package them, call them a security, and sell them, the profit (and resulting bonus) was theirs and the risk of loss was someone else's.

Those holding these worthless ("toxic") securities wanted protection. So AIG issued insurance -- an agreement to make good on the mortgage/security if it turned out to be worthless because the debtor defaulted on this "credit" -- a "credit-default swap."

For more details on what AIG and the banks did to our economy see Joe Nocera, "Is AIG the Worst of Them All?" New York Times, February 27, 2009 ("the practices that led to its troubles . . . were shocking"); and "Propping Up a House of Cards," New York Times, February 28, 2009 ("Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more . . . Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. . . . either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up. That would be us, the taxpayers").

Normally insurance, whether home, auto, or life, is designed to spread the rare or occasional loss among a great many premium payers. Every homeowner has fire insurance, but very few have fires -- there's no "bubble" that suddenly bursts and causes all homes to burn, thereby bankrupting an insurance company suddenly called upon to pay full value for 40% or more of the homes it insured.

Moreover, regulated insurance companies are required to maintain "reserves" sufficient to pay off an unexpectedly large number of claims. (AIG's conventional insurance operations are still profitable.)

By contrast, when the real estate bubble bursts during an economic downturn it tends to burst nation wide. Providing "insurance" for mortgage defaults means the insurance company has assumed the risk that when the bubble bursts it will be responsible for the losses sweeping an entire industry, not just those of a handful of individual investors.

Not only is this not a normal -- or sensible -- risk for anything called an "insurance company," credit-default swaps are not regulated, and therefore do not require reserves -- creating the risk of a kind of double whammy of losses.

In short, the taxpayers are bailing out, assuming executives' and investors' losses, brought on from fraud, greed (or, at best, stupidity and ignorance). This includes the folks who sold the mortgages originally, who bundled them into securities, who bought and traded those securities, and who insured those investors -- all a pretty scummy lot who should have known better and were engaged in fraud-like behavior bordering on, and sometimes crossing over into, criminality.

They must be thought of, in moral terms, as the equivalent of the arsonists who cause major forest fires, with injury and death of the individuals caught in the fire and those brought out to fight it, property damage in the millions or billions of dollars, seriously disrupted lives, and a drain on taxpayers' resources.

Those fires are not "acts of God." Nor is this economic calamity. Both are the clearly predictable result of reckless and irresponsible behavior by humans. The only difference is that those who deliberately set the woods on fire don't personally profit financially from their acts. These men and women did. It's like crashing the power grid, causing Americans to freeze in the dark, or setting loose a computer virus that ultimately brings down the Internet and causes billions of dollars of losses

In short, the harm these corporate executives have done goes far beyond their own investors, employees and retirees. It goes beyond their customers. It has resulted in what may prove to have been the most serious body blow ever suffered by the American economy and the people whose welfare depends upon it. And we now know not only does the suffering go far beyond our shores and fall most heavily on those least able to withstand it, but it has become a threat to our national security far more serious than anything threatened by "terrorists" -- as the CIA must now brief the president each morning on the potential threats to our country, foreign and domestic, brought on by this sorry lot of bankers. See, Nicholas Johnson, "Terrorist Bankers," February 13, 2009.

So why has our government given them a single dime, let alone the trillions of dollars it has -- including what will soon reach $250 billion for one company alone, AIG?

It's the old "they're too big to fail" ruse. My response? Any company too big to fail is simply too big; the sooner it can be broken up into manageable-sized pieces the better.

These "toxic assets" have some value -- or would if the government would get out of the market, remove any possibility of a bailout, thereby forcing the holders, and potential buyers, to do the sorting through of what's in those securities, and put a price on them. Of course no one's going to buy them for their true value so long as the government can't make up its mind but may, in the end, buy them for much more than they're worth. These securities actual market value may be a lot less than what the holders paid for them. That's too bad. But that's the way their beloved "marketplace" is supposed to work.

No one ever promised them this system of privatized profits and socialized losses that these johnny-come-lately socialists now believe is their birthright.

One of the best television explanations of how we got into this mess, and how little the relevant government officials really knew about how to get us out, was prepared by PBS' "Frontline" in its show titled "Inside the Meltdown," February 17, 2009 (the link goes to a complete online video, transcript, timeline of the economic collapse, and other features).

If you think global economic collapse is of sufficient significance to warrant an hour of your time coming to understand the tension between the competing concerns over "moral hazard" and "systemic risk," and the meanings of "toxic assets," "bundled, securitized mortgages," and "credit-default swaps," I highly recommend the show. Not only is it a balanced effort to inform, it's also entertaining -- not in a "Daily Show" way, but because it is so well written, shot and edited into a classic "Frontline" presentation.

Related Blog Entries on Global Economy and Bailouts

Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers,"
February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009


* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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1 comment:

Anonymous said...

Nick - thanks for the Frontline link, I found it quite informative. After viewing, I tried tracking down the 1 page "contract" that Paulson made the 9 big bank CEOs sign prior to the infusion of the $350b in funds, but couldn't find it on the web. Have you seen this document? It is referenced in the last part of the show and was given to them in the October 13, 2008 meeting. I'd like to know what the "terms" were on that 1 page document...