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Hullabaloo


Tuesday, September 16, 2008

 
Congratulations, You Just Purchased An Insurance Company

by dday

Johnny, tell them what they've bought 80% of:

Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.


Yes, that's right, you've got a troubled insurance giant with billions of dollars tied up in worthless pieces of paper masquerading as securities. Yours for the low low price of $85 billion dollars!

You know, if this was Bolivia, the State Department would put out a strong statement declaiming the nationalization of industry and the stifling of private enterprise. But of course, in this case, industry made horrible decisions, so that justifies the Communism. It's unclear to me that it's even legal for the government to structure this absent legislation, but we're in a brave new world.

To be clear, AIG perhaps was too big to fail. And the hash that has been made of the financial markets cannot plausibly be worked out without government intervention. But can this be the end of the "drown government in the bathtub" rhetoric we've heard from conservatives since Goldwater? They eliminated regulation and oversight, ignored the maddening decisions made by the big banks who gambled with borrowed money and lost, and then obliged as the corporations came begging for a handout.

By the way, this could have been handled for $45 billion less three days ago. The shorts battered AIG's stock so mercilessly that they put taxpayers on the hook for twice as much.

I've said it before, but given the circumstances I don't know why anyone would want to be the President right now. But whoever gets the job is going to have to roll back all the deregulation initiatives that caused this mess. This has cost taxpayers and investors dearly, and the ones responsible are largely getting away with it; the CEO got a $47 million dollar severance package back in July.

Their debt, the result of their horrible choices, is now our debt. The risk has been socialized. And to top it off, this is an INSURANCE company who couldn't manage their own risk.


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