On September 16th, 2008, the United States government agreed to ‘bailout’ American International Group (AIG). The reason given to taxpayers for this decision was to “save financial markets and the economy from further turmoil”. Since that day in September, all we have seen are sluggish financial markets and economic turmoil. The American taxpayers have been left wondering if they really needed to bail out AIG in the first place.
AIG is the world’s largest insurer, and we were told that allowing the company to fail would have had a detrimental affect on financial markets. Over the past few months, the government has bailed out big companies like Bear Stearns, Fannie Mae, Freddie Mac, and AIG, yet they allowed one of the largest investment banks, Lehman Brothers, to go belly up. How did they decide which companies were worth saving and which ones were not? We have no way of knowing how each decision was made, but it’s clear that the government was not interested in spending money on every business that needed help and we are to trust that they made those decisions in the name of financial market stability.
Less than a month later, the U.S. Congress passed the “Great Bailout of 2008”. That bailout, unlike the others, required congressional approval, but like all the others, was passed with the promise to restore confidence in the credit industry, stabilize the market, and save us from even greater financial ruin. Only this time it cost a heck of a lot more than all the others combined.
When Congress passed the Great Bailout the American people were re-assured there would be transparency so they would know how much of their money was being spent, and where that money was being spent. So far, that hasn’t happened.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson assured Congress (and the American people) that the bailout would be run with full transparency. Paulson said he wanted transparency and Bernanke said that transparency was
the big issue. Apparently, the issue of transparency it isn’t quite big enough.
The Federal Reserve is refusing to identify the recipients of the bailout loans, and they claim that releasing that information could undermine public confidence in the financial system. They must be kidding. I don’t think the public trusts them with the money, let alone with the information needed to keep all of the different financial sectors afloat.
The Federal Reserve has already loaned over $2 trillion under 11 different programs during the course of the past 15 months. $2 trillion!!! Don’t act so shocked. The Federal Reserve has not been limited to the $700 billion bailout passed by Congress in October, and they have the authority to make more emergency loans with our money, as they see fit. Apparently, with no oversight, and zero transparency.
We hardly know anything about any of the bailout deals, and very little has been reported in the media. We do know that the AIG bailout gave the U.S. taxpayer an almost 80% equity stake in the company. That equity came in the form of warrants called equity participation notes. The “loan” as they call it, only has a two-year term and is not interest free. The loan is secured by AIG assets which could prove quite profitable for American taxpayers if the company recovers, but if not, the U.S. government will suddenly become the largest insurer in the world. If that happened, it could lead some to think this may have been the plan all along.
You’d think that throwing $85 billion at the problem would have solved it, right? That simply was not the case. It was only the beginning of a long and winding road that ended up with another $40 billion “investment” being made by the government to “shore up” the initial bailout.
The original AIG bailout amounted to $85 billion, and today the government announced they were “investing” another $40 billion in AIG Preferred Shares to establish a more durable capital structure and resolve liquidity issues.
Maybe it’s just me, but if you loan a company $85 billion and they still have liquidity issues, you might want to think about cutting them off before they bankrupt you.
This “followup” bailout reduces the initial amount of the first bailout from $85 billion to $60 billion, but then adds an additional $40 billion to the overall cost of the plan. This second round of funding, as I will call it, will come from the Treasury TARP (“Troubled Assets Relief Program”) fund. The TARP fund is the money allocated by Congress with the Great Bailout of 2008.
Without transparency, however, we’ll never know exactly how these companies are using that money. In fact, just days after the initial AIG bailout, executives at AIG rewarded 70 of their top performers with a week long stay at the St. Regis Resort in Monarch Beach, California. This wouldn’t have been news if they had not spent $440,000 to do so. Should we, the American taxpayer, be paying almost $6,300 per person to reward “top performers”?. Aren’t those “top performers” the same people who helped put the company in the position it was in when the government decided to fork over $85 billion in the first place?
Pardon me if I seem a bit skeptical, but neither the companies involved nor the Feds have given me any reason to think that we’ll ever know what’s really going on behind the scenes. We’ll never know the details of these “investments” or how bad all of these decisions are really going to be for the American people, until it’s too late.