In a recent blog, I talked about the growing number of bailouts appearing in the news these days. Perhaps the most infamous (and costly) is that of AIG.
The insurer is the beneficiary of an ever-changing, always-increasing and apparently open-ended loan from the federal government. After AIG recently posted a record-setting $62 billion quarterly loss, the government again overhauled its loan to the company in an effort to keep it afloat. What’s more, AIG is slowly being nationalized, with the U.S. government currently owning just about 80 percent of the insurer.
What’s the point of helping a company that posted a $99 billion loss in 2008? Even more importantly, why should us taxpayers have to help pay for their mistakes? Why not just let them fail? After all, isn’t that the American way?
As you know, in the case of AIG, it’s just not that easy. Because of their huge influence on the worldwide financial system, AIG’s failure would have potentially catastrophic results. It looks like we’re stuck footing the bill, whether it’s fair or not.
But according to a recent article by Joe Nocera that appeared in the New York Times, just because the situation has been forced on us doesn’t mean we have to be happy about it.
In fact, Nocera goes so far as to say that one of the reasons that AIG finds itself in this situation is because it was basically running a scam. By taking advantage of loopholes in the system (along with its, at that time, AAA rating), AIG built a colossal house of cards that was bound to come crashing down eventually.
To add insult to injury, Nocero points out that although the government is now fully and painfully aware of the implications of AIG’s past business practices, they are forced to continue using them. The alternative is defaults on hundreds of billions of dollars worth of credit-default swaps that could bring the banking system to its knees. Wait, it’s already there, isn’t it? Okay, whatever’s worse than that.
As Nocero puts it, “A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.”
After reading accounts like this, it’s hard not to have a bad taste in one’s mouth. Or am I missing something?
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