There has been a lot of angry commentary on the bailout and bonuses of AIG. The general consensus is that Pitchforks and boiling oil are none too good for the executives receiving outrageous bonuses for losing company money! Congress is screaming for blood. But most legal experts agree: a poorly written contract that gives more to the employee than the employer is still a binding contract. Blame the idiots who wrote the contract for AIG a year and a half ago. (You might also have the Dept. of Justice check out whether any criminal actions of fraud were involved on the part of those same dumb AIG officials! Just in case.) But bottom line is that those contracts are legally binding no matter how much they smell. The real irony would be if we spent more on legal fees fighting the payment than the payment actually amounted to.
Many are advocating that we let AIG fail. But as we saw with Lehman Brothers, letting a major “too big to fail” company go under, sends massive shock waves through the financial community. And since AIG is THE largest insurer in the world, we would be looking at an unprecedented financial disaster. Why? Because AIG insures 81 million people with life insurance world wide for a grand total of over 1.9 trillion dollars. AIG also insures businesses against loss, movies against injuries to stars, gulf oil platforms against hurricane damage. If it becomes apparent that the parent company is going under, then a “run” on the policies could start. If all 81 million people decided to cash out their policies at once, it would get very expensive! Financial institutions all over the world would be scrambling to find the cash. This would necessitate selling off bonds which would then freeze up the bond markets. Credit markets would follow soon after. Think of it as Financial Armageddon on a global scale! We may not like this scenario, but since we as a nation decided in the 90’s that financial institutions could “self-regulate” and did nothing to stop the growth of AIG…we must live with the milk we spilt! At least until we have time to disassemble the AIG monster carefully without harming the markets.
So we have to clean up the mess. That requires that we understand exactly how we got into this mess to begin with. Many on the left will try to blame Bush for this, but the truth is that the real start of the problem traces back to Alan Greenspan and Bill Clinton in 2000.
That’s when President Clinton signed an Omnibus Spending Bill to keep the government running at the end of the fiscal year. That Bill contained the COMMODITIES FUTURES MODERNIZATION ACT OF 2000. This new law de-regulated trading of energy futures and insurance policies. (This same act was also responsible for the ENRON fiasco.)
What this Act did for AIG was to allow them to sell a type of insurance policy known as “credit default swaps”. Much like a fire insurance policy on your house, this let an investor purchase policies to insure bonds against loan defaults. Unlike your home policy, this type of bond insurance was left completely unregulated. Investors could purchase insurance on bonds they didn’t even own. This meant that companies like AIG would write credit insurance many times over on the same bond. Many of these bonds were tied to home mortgages. When the housing market went belly up, AIG was in the position of paying out on these bonds. ALL OF THEM! It’s a little like an insurance company having to pay me and ten other investors because YOUR home burned down. These multiple, unregulated transactions broke the financial back of AIG.
It should be noted that the sponsors for this legislation were: “Rep. Thomas W. Ewing (R-IL) and cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA) and never debated in the House.[2]
The companion bill (S.3283) was introduced in the Senate on December 15, 2000 (The last day before Christmas holiday) by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD) and never debated in the Senate.” (You should note that this Act is an excellent example of the type of deregulatory advice advocated by John McCain’s chief economic advisor, former Sen. Phil Gramm.)
So now that we have the milk spilt all over the floor and are spending huge amounts of money to save AIG, we must determine how to keep this from happening again. The bonuses paid out are annoying, unpatriotic and detestable on many levels; but it’s still milk already spilt. Our focus must be on how to keep this from happening again.
Obviously, we must relearn the mantra of the past, “A business too big to fail is too big”! You really have no right to complain about the mess on the carpet if you give an unsupervised child a gallon of milk to drink from the bottle. You give the child a sippee cup and you watch him with it so he doesn’t destroy the carpet. In a similar manner, the government must be given and must use an oversight authority to keep corporations small enough not to create a systemic risk to our overall economy if they fail. That means Congress needs to start writing new regulations immediately.
This re-regulation has always been a campaign promise of President Obama but timing was not on his side. Two months into an administration is barely enough time to learn your way around the White House, to say nothing of fixing decades of de-regulation. Current proposals include increasing the Federal Reserve’s oversight to include commercial banks, security companies and insurance companies (which are generally regulated by the states). Hedge Funds and securities companies will face stricter disclosure requirements.
Recently, President Obama stated: ““
We now know from painful experience that we can no longer sustain 21st-century markets with 20th-century regulations….Strong financial markets require clear rules of the road, not to hinder financial institutions but to protect consumers and investors and, ultimately, to keep those financial institutions strong.”
Let us hope that our political leaders keep focused on the most important aspect of the AIG mess….fixing it so it never happens again!
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