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Stop The Bailouts
Mark Lennihan / AP Photo
A year ago today, the government rescued AIG, beginning a process that has given Wall Street every reason to double down on bad bets. We deserve to know when it's going to end.
Financial bailouts of seem like yesterday’s news these days. They happen all the time, and not just to help greedy Wall Street types. Banks get bailed out. Auto makers are given funds to reboot. I’m just waiting for the argument to be made that money-losing newspapers should get bailout money because it will save jobs by keeping journalists employed, and paper mills running while serving a higher purpose of maintaining an informed electorate.
As one Fed official told me, the worry was that people were losing so much money because they either traded with Lehman or were caught up in the panic, that letting AIG go would be the final blow to the financial system.
There’s a societal good in all these bailouts, we are told. Jobs are saved and in the case of banks, “systemic risk” is avoided, which means that the values of stocks allegedly wont come crashing down by saving, say, Goldman Sachs and Morgan Stanley. Still, it wasn’t that long ago that the federal government used to think that propping up a failed business was something to avoid. It had to do with one of the central tenants of the free market system—companies that fail generally make inferior products (GM and Chrysler) or have inferior people working for them who do stupid things (Wall Street), and so, the theory goes, by bailing them out, you’re misallocating resources, throwing good money at what’s bad. Scarce capital is being diverted to save a few jobs at lousy businesses, when it could be used to create more jobs elsewhere.
With that in mind, I started thinking, when did this notion that money-losing companies and their moronic executives should be bailed out begin? The answer: A year ago today. On September 16, 2008, the insurance giant known as AIG, was bailed out by the federal government to the tune of around $85 billion (that number is now closer to $180 billion).
• William Cohan: The Unnecessary Financial Crisis
• Nomi Prins: The Next Meltdown AIG wasn’t always a disaster. For decades, it was run by a brilliant, albeit ruthless executive named Hank Greenberg, until a ruthless, albeit brilliant New York prosecutor, Eliot Spitzer, forced him out of the firm over a minor accounting issue (if you don’t believe the accounting “scandal” Spitzer nailed Greenberg on was minor, consider the recent settlement with the SEC in which Greenberg paid a paltry $15 million to settle). After Greenberg’s ouster, the risk that AIG took, particularly in providing insurance on risky debt grew to enormous proportions.
The new management, led by Martin Sullivan, appeared to have little idea what was going on at their own firm. Within three years of Greenberg’s departure, and after Greenberg reminded the world dozens of times that the firm was being run by people he considered dumb, AIG became insolvent.
• Allan Dodds Frank: The Meltdown’s 10 Biggest Losers This time last year, the ruling commission of the financial regulation, then Treasury Secretary Hank Paulson, Fed chairman Ben Bernanke and then New York Fed President (and current Treasury Secretary) Tim Geithner, had just let another business run by reckless and inane risk-takers, Lehman Brothers, bite the dust. The reason: That’s what’s done in a capitalist economy. Risk takers who lose aren’t to be rewarded. There really isn’t much difference between Lehman and AIG, which in one of the most reckless displays of corporate spin, at one point in late 2007 promised the world that its portfolio of risk was minimal, before disclosing just weeks later that it wasn’t.
And yet this day last year, the Feds forgot about their little line in the sand and saved AIG just hours after letting Lehman die. People in government tell me that they had no choice but to bail out AIG, and I have no reason not to believe them. Following the Lehman bankruptcy filing on September 15, 2008, the markets weren’t just tanking, they were about to shut down.
• Charlie Gasparino: No More Wall Street Arrests? As one Fed official told me, the worry was that people were losing so much money because they either traded with Lehman or were caught up in the panic, that letting AIG go would be the final blow to the financial system. Financial intermediaries would stop buying stocks and bonds, and every other commodity. Goldman Sachs, which had tremendous exposure to AIG, would fold, as would Morgan Stanley and other banks. Asset prices could fall to zero. And that’s about as close to financial Armageddon as this country has ever faced.
So the Paulson-Bernanke-Geithner team threw out their old playbook, the one where only the fittest survived, and embraced socialism in a big way. Using taxpayer dollars, AIG was bailed out, and when that really didn’t work, so was the rest of Wall Street, with billions of dollars funneled into the big banks in the form of direct capital injections and various “guarantees” on their toxic assets. The auto makers came next because they’re “systemically important” as well. The car companies keep alive many feeder businesses that supply the parts of the cars Americans don’t want to buy, at least not enough to make the GM and Chrysler viable businesses.
In his much touted but disappointing speech Monday afternoon, President Obama suggested that he stands fully behind the policy of protecting “systemically important” financial institutions no matter how much risk they take or how much money they lose.
On the anniversary of the birth of Bailout Nation, we deserve to know when these bailouts are going the end. The money being plowed into these bad businesses is, of course, taxpayer money. And, yes, I understand the notion of systemic risk—namely by letting a company like AIG fail other businesses are affected in such a way that the economy and the markets can shut down.
But I also understand the notion of moral hazard, and between President Bush and President Obama, moral hazard has been established like never before in American history, meaning the risk takers and the failed businessmen have been given every incentive to double down on their bad bets again.
Maybe that’s why I think the president should declare September 16 2009, No More Bailouts Day. But I’m not holding my breath.
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
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Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.
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Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.
johnnyapplecd
Actually, we're headed for the same diaster all over again, mainly because the bailouts weren't socialist ENOUGH. Why give away all of that money to protect something from a handful of idiots without simultaneously establishing rules to control/watch over the idiots? Obama should've attached every condition legally possible to those billions, hell, the Gov't should've just taken over. Yes, our bureacracy is slow, stupid, and run by apathetic jerks. It's very telling that it's still leagues ahead of the financial leadership who recieved all of that bailout cash--the same people who are going to drive us into the muck all over again as they profit from ultra-risky, highly leveraged derviatives trading.
All that money, and we couldn't get a single rule, not one piece of paper signed by those morons to stop them from using the same tools to destroy us as they did a year ago.
People suck.
aagjr733
It was bush who did the unsecured bailouts a year ago,Obama wasn't elected until November,DUH.
BullMoose
Please do not confuse the patients with facts. The repugs intellectual faculties are fragile, and any overload can cause them to go postal.
johnnyapplecd
A mistake on my part, but immaterial. Obama could still push for legislation. Could've attached all kinds of conditions for the auto bailout. He had a great opportunity to let gov't take charge of everything that keeps the country running-- oh wait, he can't, because if he takes even moderate, middle-of-the-road action, he gets called Hitler by thousands of complete fucking moron voters, who are then backed up by their elected representatives. Not to mention hacks like Gasparino, who seem to think that these things are better left in the hands of profiteers.
Llplo99
@johnnyapplecd - Obama did attached all kinds of conditions for the auto bailout to safeguard taxpayers investment---he forced them to restructure and changed management However critics take it as Obama spending a lot of money, creating big government and getting into the auto business...in other words, he is damned if he does and damned if he doesn't.
cassandravert
It wasn't Bush or Obama, it was Congress. The same Congress now considering the Health Insurance Profit Protection bill.
neverlate
Its too late. The damage has been done. Wall Street will soon be and arm of the Government as soon as they figure how to get around the pay scale issues.
PacificNWMark
What is the point of this piece? That we'd have been better off letting AIG go, when - in Gasparino's words - 'asset prices would fall to zero' and we'd reach 'financial Armageddon'?
Most reasonable people find the bailouts to be distasteful but the alternative - financial Armageddon - was much worse. It takes a special brand of ideological zealotry to cling to a theory (no bailouts) when you *know* that the results will be cataclysmic.
Ironically Obama's speech this week (which Gasparino found 'disappointing') in most respects declares the era of bailouts as over. The president outlined a broad series of reforms that taken together would help prevent the repeat of the sort of environment we faced last fall.
And Obama was blunt in his warning to Wall Street: "We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall."
(source: http://blogs.wsj.com/washwire/2009/09/14/text-of-obamas-wall-street-speech/ )
The challenge of course will be in actually passing any sort of regulatory legislation, where the administration will need to not only fight the Republicans, but presumably free marketeer acolytes like Gasparino as well.
artois
Asset prices falling to zero would have been disastrous for those who held those assets., For those taking the correct positions it would have been terrific. But what is certain is that Goldman's traders would have been on bread lines which is where they should be.
Llplo99
True...Goldman realizes that per a Washington Post article earlier this week. However, besides asset values dropping to zero, there would have been panic in the international financial markets since the US has always been the safe investment during times of panic because of the belief that the US is a stable economy. An international crisis would have had a domino effect and we probably would be in a longer and more protracted recession or even depression.
johnnyapplecd
Yeah, Obama's great at this part, the speech-giving. I voted for him because his speeches made me thnk he was going to FIGHT!
Do you see any fight?
Where's the FIGHT, goddamnit?! Kick their asses!
sophia5
Why should the rest of us
believe you "Financial Experts" at this point ?
How many of you "Experts"
were sounding the alarm ?
Do you "Experts" have any credibility left ?
Here's analysis from a NON-Expert,
a regular working stiff.
We will not survive
as a country of paper pushers.
We don't make anything anymore,
and that's fine with Wall Street as long
as those factories (formerly American)
in China and India keep churning.
AlanD2
sophia5: Some financial experts like Paul Krugman were sounding alarms several years before Bush's Great Recession.
Conservatives were too busy making bonuses to pay any attention. (You don't really think there were any Democrats in the financial industry, do you? Well, maybe the janitors...)
Llplo99
Not necessarily...not all Wall Street finance people are Republicans. Many of my Wall Street friends are democrats and did not participate in the mortgage back asset markets and credit default swaps.
AlanD2
Llplo99: Were they high-level executives that could set policy, or just worker-bees?
AlanD2
Llplo99: Were your friends high-level executives that could set policy, or just worker-bees?
Llplo99
"We will not survive
as a country of paper pushers.
We don't make anything anymore,"
That's why you need an education...something the Far Right can't seem to understand.
coachgss
Charlie, Why do you continually spin this bs notion that Goldman would of "going down" if the government didn't bailout AIG. According to the congressional Audit.. 50% of the Aig counterparty money went overseas. Goldman had enormous exposure but actually "laid off" a great deal of that exposure. The true problem with letting AIG go was the commerical paper mkt.. Short term funding was "non-existant". This directly effected Walmart, Goldyear, teachers salaries. grocery stores.. etc.. Plus stop thinking Hank Greenberg was SO Sharp.. Please.. he hired Joe Cassano!!
Hawnzz
I married a banker. (So I've heard about this over and over and over again... argh) Most of the banking industry is not responsible for this travesty. However, it was some of the largest entities and they were not just too big to fail... they were essentially the system itself.
We did not just prop up companies. We were also saving the dollar itself. Last September 17th I believe, more then 2 trillion dollars an hour were being pulled out of the U.S. coffers by foreigners trying to protect their assets. The Fed shut down the system. We were literally 6 hours from financial ruin.
These companies were so large that they were the equivalent to the electric company of a large city. (The city being the United States of America.) If these companies had failed, lights out America. You could over ended up using the dollar for wall paper.
I do agree on one point. After the companies and markets were stabilized, why haven't these companies been broken up? The saying we've heard over and over, "Any company too big to fail is too big to exist" is so very true.
Hawnzz
Sorry about the typos... it's early.
artois
What does that mean? So what if "most of the banking industry wasn't responsible for this travesty"? If they were in the same firms, had unmanaged exposure etc. that put their entire firm at risk than let the chips fall where they may
LexLysianLucifer
"I married a banker...............We did not just prop up companies. We were also saving the dollar itself. Last September 17th I believe, more then 2 trillion dollars an hour were being pulled out of the U.S. coffers by foreigners trying to protect their assets. The Fed shut down the system. We were literally 6 hours from financial ruin...............If these companies had failed, lights out America. You could over ended up using the dollar for wall paper."
Oh, God! Spare me this Banker-as-American-Hero bullshit. "This travesty" was fucking GREAT for the dollar; it made 15-20% gains against every major currency except the Yen.......in just a few months. The US treasury could have gotten some excellent deals buying foreign assets. But no......you know what it decided to do?
It decided to buy domestic banker-scum..........lifting it up out of the sewer of greed and failure to which the free-markets had consigned it. You wanna buy sewer-scum----as a National action------you BECOME sewer-scum as a Nation.
Lord Turner, the UK financial regulator, has ascertained that 90% of finance has ZERO social benefit. To buy ANY of that 90%, which the market was in the process of shaving off, is to commit an egregious and critical moral mistake.
If the dollar fails(and it probably will), it will be BECAUSE of the spineless American CHOICE, not made by Americans but by the Goldman Sachs--Paulson-US government conspiracy, to coddle the reptilian banker-scum community that has been robbing investors for years.
We didnt ask for this(in fact, embarrassingly enough, we once actually believed the advertising......that America was a noble machine of capitalist value-creation). But after so much American idiocy........so much corruption and financial crime, we've got it now. We've got this stupid country 6 ways to Sunday and trust me, there's gonna be some BIG and fucking RUTHLESS changes.
"This is day one, Sydney"
BullMoose
When you marry a banker and can be set for life, why the need to apologize for spelling errors? Like you really need to work and worry about spelling.
magicman
I hate to point out the obvious, but the recent arrival in town of a retired NYPD Officer, has brought the chickens home to roost when it comes to bailing out Government Agencies. You see, the lovely police man was removed from the Force for Public Lewdness. Something happened in the Bronx everyday this man was 'on patrol' with the lights, camera and ACTION turned on. This dolt receives a full Pension after 8 years of service and which coincidentially exceeds the normal incomes of hard working Americans.
If you are wondering how 'far off' our National Priorities are...you need look no further than this incarnation of Beaurocratic Wealth.
Hawnzz
What does that exactly have to do with the topic at hand. (The bailouts and banks?)
ElvinMelvin
I cannot take you seriously if you do not know the difference between "tenet" and "tenant."
japanval
I can't agree more, Elvin
leonfreilich
WALL STREET ANNIVERSARY
If you see this needed headline, please rush & phone us:
"When the Bus Crashes, Does the Driver Get a Bonus?"
BullMoose
Watch out!!!! The latest scam is a copcat of the last one.
The only difference is instead of toxic mortages being bundled, the charlatans plan to steal your life insurance , bundle it up, and sell it off. Then when it is lost by the markets, by the big hedge funds, you will not have any life insurance left. Bye bye, all gone.
artois
When did ole Charlie get religion? Isn't he the one who wrote beaucoup pieces (along with that dolt Cohan) on why Goldman is smarter than everyone else. It's clear now as it was then AIG was bailed out because if Goldman's exposure to it, just like JPMorgan was saved by having the Fed backstop its acquisition of Bear.
dana64
IT IS ALL PLANNED ..............folks
OUR 401K are HOSTAGE..............and the GOV had to pay the RANSOM to wall street...................
VinnyB
I would love to know what the figure would be if we totalled ALL the bailouts and distributed that amount among taxpayers. I'm sure it would be enough to buy a car, fix a home, and pay off debts accumulated over the past couple of years. We wouldn't even need bank loans to do that. Whoops! That's why it didn't happen. The taxpayer doesn't own our politicians the way the banks, Wall Street, and insurance industries do.
dana64
VinnyB you are quite right.
but the prevailing attitude is that People are DISPENSIBLe even disposable.........BUT BANKS and CORPORATIONS are NOT.
DO YOu know how much the BAILOUTS of GM and Chrysler cost ?
25 billions plus another 13 billion.........anyway about 50 B.
and it saved JOBS at least
COMPARE it to the OTHER BAILOUTS ? that was 700 BILLiON plus other goodies the FED allowed.
BullMoose
The total of Bushie boy's tax cuts , both of them costing over a trillion, along with another 2 trillion total on Iraq, Karzai, and Musharaff, with the Blackwater and Halliburton contractors (Cheney), could have paid for 50 million uninsured for 10 years.
But the payroll taxes of the working poor , with their Social Security tax, and Medicare tax, and God help you in a State tax part of the Union, are what keeps the wheels greased.
dana64
Mr GAsparino........... I would like to be polite to you, so I just would like to say that your title is MISPLACED ....as if OBAMA is in love with bailouts and has once again BAILED out some corporation just yesterday.sept 15 , 2009
You could have written THE GLOBAL financial CRISIS FORCED the bailouts on him and you hope that he would declare and END to bailouts.
By the way................i think the CAR industry is the only one OBAMA bailed out..........and it costs so much less than the WALL ST bailouts.....
iF you wanted to be fair.............YOU Could Have mentionned tthat.....!!
BullMoose
I pledge alleigance to Goldman Sachs, and the Almighty Dollar for which it stands. And for the Wall Street charlatans who perpetuate the theft, that supplies the Republcian rich for which they serve their God of Mammon.
One Nation, behind gated walls, protected by Blackwater, and to Hell with the unwashed masses.
Thank you.
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