Stop The Bailouts
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.