Global Economic Crisis

Just over a year ago, simultaneously with the implosion of Lehman Brothers, the U.S. Federal Reserve and Treasury Department decided not to let American International Group  fail, no matter the cost. That bill has been heavy; $182.3 billion of U.S. taxpayers money has been injected into AIG to ensure its survival amidst massive losses on its London-based credit default swap business. Each and every citizen of the United States has been billed more than $600 to cover AIG’s losses. In effect, the Fed and U.S. Treasury have used the zombie-like subsidized life support of AIG as a pass-though, transferring billions of dollars to investment and foreign banks. The largest recipient of American taxpayers money transferred through AIG was Goldman Sachs, which received a $12.9 billion payoff, which seems to have gone straight into bonuses for its senior executives. Was it mere coincidence that Goldman Sachs CEO Lloyd Blankfein sat in on a meeting with Ben Bernanke and Hank Paulson to decide on the scope of the taxpayer’s subsidy to AIG?

The Fed and Treasury, which decided on their own to effect a bailout of AIG without any input or sanction from Congress and the American people, have assured us that their infallible judgement can be relied on to make the correct decision for the U.S. taxpayers. Well, that “infallible” decision-making has left the American people tied ball and chain to a private corporate entity that is still losing vast amounts of money. AIG has recently reported its Q4 results: a loss of $8.9 billion. This may be a sign of more red ink to come, as the global economic recovery falters amid mounting concern over high unemployment and sovereign debt crises. AIG apparently is not done as a costly financial liability for the citizens of the United States, despite the fact that not a single one of them had the opportunity to vote in favor of this hideously expensive experiment in corporate socialism.

If Goldman Sachs were not the recipient of AIG pass through money in the last quarter of 2008, it is clear that this firm would be facing the serious prospect of liquidation. It is therefore somewhat odd that after a catastrophic last quarter, the firm can gleefully announce a return to profitability in Q1 of 2009. To set the record straight, Goldman Sachs should come clean on any funds it received from U.S. taxpayers, passed through AIG, in the first quarter of 2009, and provide a precise accounting on how those payments affected their Q1 bottom line. Absent this transparency, Congress should demand full disclosure on any continuing payments to Goldman Sachs through the corporate corpse called AIG. In the final analysis, if it transpires that AIG payments are what is keeping Goldman Sachs alive, then the Obama administration should explain why General Motors and Chrysler should not be wards of the state, while Goldman Sachs is anointed as the nation’s unofficial welfare queen.

AIG and its recklessly greedy and stupid executives are ample proof that modern American capitalism is not an impartial economic system based on rewards for performance, with no guarantees and safety nets for risk takers. Winners take all; losers surrender everything. That was the story we have all been told, but it has been proven time and time again during the Global Economic Crisis that this is a myth. If anything, the reverse is the case. AIG is a textbook study in how communism has infected the boardroom suites of corporate America, with the old-fashioned cold capitalism left for just the dumb middle-class taxpayers. Privatize the obscene profits, but socialize the corporate losses, especially if they are the result of reckless stupidity and massive greed.

Greed and recklessness are certainly at the root cause of the AIG implosion. Though the insurance arm of the company was solvent, a derivatives trading unit of AIG, based in London, came up with the ingenious idea of selling credit default swaps as insurance to banks, Wall Street, pension funds and other investors, public and private. These CDS products were, among other things, insurance against losses on investments in mortgage-backed securities. The AIG geniuses thought they had a whopper of an idea; mortgage-backed securities will never lose money, so therefore the insurance premiums will be an easy cash flow for AIG. Accordingly, since these CDS products will never fail, AIG had no need for a substantial reserve against losses. That was the theory. In practice, we all know what happened with mortgage-backed securities, and AIG’s unique strategy of not maintaining reserves to cover claims.

Unfortunately for the American taxpayers, the Federal Reserve, utilizing its massive powers, deemed that AIG was too big to fail, concluding that its collapse would create systemic risks to the entire global financial system. In essence, the Fed decided that AIG must be propped up at any price, and that decision was made with no input from Congress or the American people. At first, the American people were told that AIG required a “loan” of $85 billion, and that the taxpayers would get their money back-some day- when the “healthy” parts of AIG could be sold for reasonable market value. Now, however, the AIG bailout cost has climbed to $185 billion, and it should be clear to us all that the American taxpayers are not “loaning” their money to AIG. They are funding a flow-through of payments to clients of all kinds of insurance “products” and bets that the brilliant executives at AIG chose to underwrite, with the end nowhere in sight. Not even the Federal Reserve and U.S. Treasury knows what the final bill will be, but it is likely to exceed a half-trillion dollars.

The same brilliant executives at AIG who were the architects of the near-meltdown of the financial world, the acceleration of the Global Economic Crisis and the transformation of their company into a zombie entity, only kept alive by transfusions of taxpayers cash, still think they are entitled to large bonuses for their masterful work. Bonuses beyond their already excessive compensation. With the same temerity they displayed in conceiving of their credit default swaps, the top management of AIG decreed hundreds of millions of dollars in bonus payments be made to the firm’s executives. This included $165 million in bonuses to the derivative traders at the AIG business unit responsible for our current global financial calamity. However, not even the arrogant management of AIG could justify these bonuses as “performance payments.” So, in their typically dexterous mode, they simply did a word substitution and called these bonuses “retention awards.”

Paying $165 million to retain the reckless, incompetent and greedy architects of a major cause of the Global Economic Crisis? It would appear that the AIG executives either think the American taxpayers are utterly dull-witted and stupid, or they simply could not care less.

With corporate leadership of the caliber being displayed at AIG, does anyone still wonder why American capitalism is in trouble?

How much is $185 billion? The financial numbers associated with the bailout mania that has occurred in the wake of the Global Economic Crisis tends to obscure the real meaning of these massive amounts of money being distributed by governments all over the world to businesses deemed “too large to fail.” To put the total AIG bailout package in perspective, $185 billion represents a payment by every man, woman and child in the United States to American International Group of $616, or about $2,464 from every family of four. Yet not a single ordinary U.S. citizen, not one average American family was consulted over this financial commitment by them that involves keeping alive a business that was recklessly managed and engaged in risky financial strategies. A commitment that may likely mean that the typical family will be on the hook for what is a sizeable amount of money for most Americans. And that is just one bailout of a company deemed “too big to fail.”

AIG is, after all, not the only recipient of taxpayer bailout money. There is the $700 billion TARP rescue of financial companies and banks, soon to be substantially increased. General Motors and Chrysler have received tens of billions of dollars in government cash, and are asking for substantially more funding. Other ineptly run businesses are lining up in Washington at the public trough, with their highly paid lobbyists making the case that these companies are also “too big to fail.”

As the Global Economic Crisis increasingly looks like the beginning of a worldwide economic depression, the impulsive commitment of staggering sums of public wealth by unelected bureaucrats and officials in Washington, in most cases without even the pretext of Congressional review, looks like a classic case of adding flammable liquid to the bonfire that is the American and global economy. Ultimately the question that must be asked is this: if the policy makers succeed in bankrupting America with their frenzy of corporate bailouts, do they then intend to make the case to America’s creditors, in particular China, that the United States is too big to fail, and must be bailed out-by them? This question, which at one time seemed more rhetorical than hypothetical, may arise sooner than we think.