In case you were wondering why the U.S. taxpayer now effectively owns what was the largest privately-held insurance company in the world, it is worthwhile to remember where ex-Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, came from. Turns out that AIG had insured a lot of the commercial paper that Goldman Sachs was holding, and that current Goldman CEO Lloyd Blankfein (pictured above doing his best to resemble the covetous
Gollum from Lord of the Rings) was conveniently on the advisory board that recommended the bail-out of AIG. Since then, Goldman has received at least $6 billion of taxpayer dollars in the form of insurance payments, money that they would not have received, mind you, if AIG had been forced to reorganize.
The best data that I have indicates that the U.S. taxpayer poured $150B into AIG (that's about $1,500 per U.S. taxpayer invested in one, effectively bankrupt, company), and holds an 80% stake in the company. If I had wanted to buy 80% of AIG on the stock market yesterday, it would have cost me $753 million (about $8 per taxpayer).
Do the U.S. taxpayers have a right to be angry about this? Hell Yes. AIG has paid out over $50B in insurance claims to institutions such as Goldman Sachs, Deutsche Bank, Merrill Lynch, and others, and small business owners STILL can't get an increase in their credit line so they can weather this economic storm. More egregious even still, AIG went ahead with planned bonuses promised earlier to the very executives who ran the small division whose outsize losses torpedoes AIG. What, was AIG management afraid that these execs would mutiny and sue the company if they weren't paid their bonuses? Doubtful. More likely is that this is a continuation of the cozy politics that have marked the entire bailout process, all at taxpayer expense.
What should and could we have done differently? First of all, we should have defeated TARP the second time. Fannie Mae and Freddie Mac, which operated with an implicit government guarantee from the get-go and were therefore compelled to buy up questionable alt-a mortgages, should have been made into full-fledged U.S. agencies where they could continue to operate as they have in the past. Additionally, Fannie and Freddie should have been given the authority to behave much like a commercial bank of last-resort. For example, if you owned a business and went to Bank of America to apply for a line of credit, but got denied, you should have been able to take your denial letter to Fannie or Freddie who would give you a second chance. If you could prove that you deserve the money and have the means to pay it back, they would give you the loan. The adminstration of the loan could have been farmed out to private companies for a fee, but the loan payments would go back to the government.
In the mean time, the major U.S. financial institutions should have been forced to bite the bullet. Some, like Lehman Brothers, would have collapsed outright, and others would find compelling reasons to merge. The resulting firestorm would have cleared up most of the dead wood. Those institutions, like the AIG financial products division, that took outsized risk would suffer the consequences, thereby tempering the enthusiasm of other risk-takers. Too big to fail is nonesense-- private risk, private pain.
Instead of funding TARP, the government should have increased the earned income tax credit, issued new stimulus checks, stood ready to extend unemployment benefits to laid-off workers, and engaged in some good, old-fashioned Keynsian stimulus (i.e. bridge rebuilding, job training, school repair and construction), while the system sweats out the contagion.
Why would this be better? Right now, all banks, whether they took undue risk or not, are trading far below their historic multiples (currently, U.S. banks are trading at 1/2 of book). In the scenario that I just spelled out, the strong banks would be picking over the carcasses of the weak and the dead. These banks would be acquiring assets on the cheap, and they would be in a position to be hugely profitable when economic growth returns. Now, by virtue of the massive investment of tax dollars, all banks are facing onerous regulation of their operations to prevent banks that are "too big to fail" from doing just that. Therefore, capital-raising, lending, leverage, and growth will all be severely curtailed in the years to come, which will effectively guarantee socialization in other parts of society. In other words, it is quite likely that we have killed western capitalism as we knew it, and the Wild West of entrepreneurial risk-taking that we saw prior to the collapse is no more.
Good riddance, you say? Keep in mind the extent to which government policies can influence the fortunes of the society at large. Do we remember the poverty and deprivation that were the norm in Eastern Europe prior to the fall of the Iron Curtain? How about the vastly different fates of North and South Koreans? All of which can be attributed to government policy, relative lack of freedom, and limitations on risk-taking.
