The AIG Bailout Debacle

Photo of AIG Lobby in NYC by: David Shankbone (CC)

The fallout over AIG's 165 million dollar bonuses (and the Federal Government's unconstitutional response) has the American public reeling with outrage. Here's an overview:


What is AIG and what does AIG do?

The BBC has this answer:

"AIG provides insurance and financial services in more than 130 countries.

The group and its subsidiaries employ more than 100,000 people around the world, including 2,000 in the UK, and it is listed on the New York Stock Exchange, as well as stock exchanges in Ireland and Tokyo.

It provides a range of insurance services to a variety of commercial, institutional and individual customers.

It also provides retirement and asset management services around the world.

The insurer has 30 million US policy holders and provides insurance to more than 100,000 companies and other entities."

Why did AIG need a bailout?

The Federal Reserve Bank announced on September 16, 2008, that it would be loaning out $85 billion to AIG in return for a 79.9% ownership of the company for the U.S. Federal Government. (Ironically, the press release noted twice that "The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.") The Fed's reasoning for this move was essentially that AIG was too big to fail:

"The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance."

Why was AIG in danger of failing in the first place?

Good question! Basically, throughout the 90s, the U.S. government decided it wanted to fuel a prosperity boom by strong-arming encouraging banks to lend to "sub-prime" mortgage candidates so they could buy houses. "Sub-prime" credit is a euphemism for credit lent out to people who shouldn't be getting it because it's too risky for the bank (and consequently for the people whose money that bank is loaning out). Too manage the risk, a lovely thing happened called "the securitization of mortgages" -banks would take a bunch of these risky mortgages, bundle them together as an investment, and sell them to bigger banks and financial institutions. There was so much of this going on that AIG had the bright idea of insuring all these risky investments, even if that meant stepping away from its successful core competency of providing traditional insurance policies to families and retirees.

How can't you believe in "trickle-down" economics? When people in the government have crazy ideas, the madness trickles down to the rest of the economy!


The AIG Bonus Scandal

Then after getting $85,000,000,000 in bailout money from taxpayers to reward and subsidize its failure and risky behavior, the story broke last week that AIG had added insult to injury by paying out $165,000,000 in bonuses to its top executives. Our political leaders' outrage at the scandal should be directed at none other than themselves. They are the ones who supported the financial bailout of AIG and who made this injustice possible. If we as Americans are angry at AIG executives for wasting $165 million of our money, we should be furious at the politicians in Washington who made this possible by wasting $85 billion of our money in the first place.

And never forget who AIG's 1st and 2nd biggest beneficiaries are in terms of campaign donations: Senator Chris Dodd and President Barack Obama:

Obama may be grandstanding about AIG’s bonuses now, but it’s worth noting that Obama himself is the second biggest benefactor [sic] of AIG political contributions. Second only to Senator Chris Dodd, who is quietly trying to tip-toe away from legislation he inserted into Obama’s “stimulus” spending spree that protected AIG’s bonuses.

Washington's Inept, Unnecessary, Illegal, Ex post facto, and Unconstitutional Response

As a treasure trove of bright ideas, the House of Representatives passed a bill to tax 90% of the AIG bonuses:

The House tax measure, hurriedly drawn up on the orders of the Democratic leadership, imposes a 90% levy on those who were paid executive bonuses if their families earned more than $250,000 annually and if their firms, such as AIG, received more than $5 billion in federal bailout funds. It passed by more than a two-thirds majority, 328 to 93.

Here's an idea: instead of taxing 90% of $165 million now, why doesn't Congress just not give away 100% of billions and billions to large financial institutions later? Here's another idea: read the Constitution. Ex post facto, selective taxation laws are not Constitutional. Furthermore, they're tyrannical! They set a startling precedent for policy in this country and sadly, they are not necessary to recoup taxpayer losses in this case. Remember that the government owns AIG now. As the largest shareholder in the company, it should ask the board of directors to rescind the bonuses and threaten to sue them as the largest shareholder if they do not comply. Politico.com has a list of 10 alternatives to the "AIG tax" (for which I hold varying degrees of support).


I promise I really hate saying "I told you so."

Anti-Bailout Merchandise