Americans awoke to the news on Monday that federal officials had spent yet another feverish weekend concocting yet another bailout. This time, the Obama Treasury Department — sounding a lot like the Bush Treasury Department — promised another $30 billion to the American International Group, the giant insurer.
It was the fourth time since September that taxpayers have been called upon to rescue A.I.G. from collapse. It brings the bailout commitment for that one company to some $160 billion.
In a joint statement with the Federal Reserve on Monday, the Treasury justified the move, saying that “the potential cost to the economy and the taxpayer of government inaction would be extremely high.”
That’s a textbook rationale for any bailout. What no one is saying — the Bush folks wouldn’t, and the Obama team seems to have taken the same vow of Wall Street omertà — is which firms would be most threatened by an A.I.G. collapse. The Treasury and the Federal Reserve noted in their statement that A.I.G. is a “significant counterparty to a number of major financial institutions.”
That means that by enabling A.I.G. to avert bankruptcy proceedings, the taxpayer is also bailing out — whom exactly?
Not knowing is not acceptable. At this stage of a deepening crisis, no one is arguing that the government should let A.I.G. collapse into a disorderly bankruptcy. It is too interconnected. During the housing bubble, it used unregulated derivatives to insure mortgage securities that turned out to be toxic — without putting aside reserves in case it had to pay up. If it now went under, there could be a chain of catastrophic defaults among banks that hold the securities and related investments.
The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.
Whoever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.
The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G. rescue last fall, it was reported by Gretchen Morgenson in The Times that Goldman was A.I.G.’s largest trading partner, with some $20 billion of business tied into the insurer. Goldman has said that its exposure to risk from A.I.G. was offset, or hedged, by other investments.
What is certain is that Goldman has lots of friends in high places — yet one more reason why this bailout has to be as transparent as possible. Lloyd Blankfein, Goldman’s chief executive, was the only Wall Street executive at a September meeting at the New York Federal Reserve to discuss the initial A.I.G. bailout. Also involved in the discussion was the then head of the New York Fed, Timothy Geithner, who is now President Obama’s Treasury secretary.
It is also painfully clear that more of the same black-hole bailouts are failing to restore stability or confidence. Stock markets worldwide tanked on Monday. A growing chorus of economists and commentators — including this page — are urging the Obama administration to adopt a more comprehensive solution: a government-run restructuring, or nationalization.
The government would not only take an ownership stake in firms that require extensive and ongoing bailouts — as it has done with A.I.G. and Citigroup — but also direct control of the weakest ones. It would get a realistic assessment of the assets crippling them and revamp their finances before returning them to the private sector, where they would be smaller and healthier and could start lending again.
We know that many Americans are uncomfortable with the word nationalization — politicians even more so. But each new bailout of old losers only feeds mistrust of the government and weakens public support for the even tougher decisions to come.
Editorial, New York Times
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Full article: http://www.nytimes.com/2009/03/03/opinion/03tue1.html
Cervantes 