Burning down the house

Q: What happens to money when you throw it into a fire? A: The same thing that happens when you give it to AIG. Today's 4th bailout of the insurance company is the most frightening sign yet of how out-of-control the financial system has become. Last quarter, AIG lost more money than any company has ever lost in three months -- $27.9 million an hour. That means every six and a half seconds, AIG is losing the equivalent of the median household income in the US.

The government's argument for pouring more taxpayer money into AIG is still the same --
it's cheaper than letting the company fail. If AIG collapses, the premise goes, the entire Western world's banking system crumbles with it. European banks are especially at risk because of all the credit default swaps they bought from AIG. Economist Tyler Cowen addresses the issue in his blog today:

No one wants to say it, but essentially the Fed has been bailing out European banks.

Marketplace PM will delve more into that issue on this evening's program. CEO Edward Liddy says AIG doesn't need more cash. He says it needs "back-up" money to "enhance the restructuring we are working on."

But how long is this going to take? Back in September, when the government gave AIG $85 billion, Liddy said he had a restructuring plan for a smaller, well-capitalized version of the company. Why didn't the government step in then and make it happen? Or in October, when AIG got another $38 billion? Or in November, when the government raised its commitment to $150 billion?

As breakingviews.com points out: "regulators can't see any realistic alternative to having taxpayers throw good money after bad."

Well, of course not now. It's too late. University of Illinois law professor Larry Ribstein says it very well:

In fact, it's even worse. The government is bailing out AIG because AIG undermined a system that the government was supposed to be, but wasn't, protecting. And now who's in charge? The government, of course.

So, essentially, the government decided to buy the house after watching it burn to the ground.

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Actually, want to know the real reason the Feds are bailing out AIG?

Guess who insures the Congressional retirement funds???

Why is it the US taxpayers problem that western european banks bought CDOs? They clearly gambled that AIG would be able to pay...and they were wrong. Let them crash. Perhaps the lessons learned will do the world some good for the next 100 years instead of being forgotten in less than 10.

Scott, somehow America reached a point where we thought that only insiders could evaluate and regulate themselves, becuase the subjects were too complicated or specialized, either inside or outside the market. But most people most of the time do what is in their interest - and the interest of the elites is to support the system that supports them. The problem we face in recent years is the detachment of the ruling elites from the interests of any of their supposed constituencies. In fact, they are their own constituencies - properly termed America, Inc., but the shareholders are not the American people themselves.

The answer to this problem and many, many other places is the self-serving, simple-minded and greedy revolving door nexus between corporate and finance and government officials. Over a period of about 20 years they have become the same with common interests. It is not so much specific policies that brought this about, but the blurring of public and private sectors by both parties beginning with Reagan. Just look at company officers and the resumes of government officials to see the proof.

Scott, this is a great point and really should be debated coming out of all this. For example, you could argue that having a Treasury Secretary in Hank Paulson who was the former CEO of Goldman Sachs might've given him a leg up in understanding what was happening on Wall Street. But does that outweigh his potential conflict of interest, real or perceived?

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