Congress thinks by analogy….and so we are stuck
Congress thinks by analogy
I don’t remember what link I followed to get to this, but never in my life did I expect to agree 100% on any issue with David Stockman. Yes, that David Stockman. Holy wow:
DAVID STOCKMAN: Credit default swaps, OK? And we weren’t bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.
They didn’t. They had garbage on their balance sheet. And the bailout was to make sure that they didn’t suffer multi $10 billion write-downs on that AIG-supported loan.
PAUL SOLMAN: So, if you had been in the administration after Lehman Brothers, you wouldn’t have supported bailing out AIG?
DAVID STOCKMAN: No, absolutely not. It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.
It’s destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.
***I don’t remember what link I followed to get to this, but never in my life did I expect to agree 100% on any issue with David Stockman.***
You might want to find and read a copy of Stockman’s book “The Triumph of Politics” which details how the financial/legislative side of the “Reagan Revolution” fell apart almost immediately. As I recall, Stockman didn’t explicitly blame Reagan for the disaster, but it is pretty apparent that even had the Republican’s idiotic fiscal ideas been feasible, Reagan was far too clueless to get them implemented properly.
I think you’ll find a lot more there to agree with than to disagree with.
There’s a difference between “rescuing AIG” and proping up the financial system. Unfortunately the rescue was managed by Paulson rather than someone who realized that the rescue needed both to keep a financial system working and make sure that the foolishness of the past decade was not repeated. It certainly was necessary to keep the banks operating. But there is no reason whatsoever that the bank management, investors, and bond holders needed to be bailed out. IMO, The banks should have gotten the same treatment GM and Chrysler did.
Stockman: “If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.”
The analogy does not seem to extend to workers and the unemployed. 🙁
Here are the top 10 recipients of AIG’s CDS paid by the taxpayer with amount:
Societe Generale: $4.1 billion
Deutsche Bank: $2.6 billion
Goldman Sachs: $2.5 billion
Merrill Lynch: $1.8 billion
Calyon: $1.1 billion
Barclays: $0.9 billion
UBS: $0.8 billion
DZ Bank: $0.7 billion
Wachovia: $0.7 billion
Rabobank: $0.5 billion
The first thing I notice is that 7 of the 10 are foreign banks.
The second thing I notice is “wow, that totals only $14.2 B” compared to Freddie and Fannie’s $400B or 28 times the amount, with 1/28 of the outrage.
The third thing I notice is that the payments that went to these banks went to their capital, and prevented them from needing bailing out. At the time it was a panic. So they bailed out AIG instead of having to bailing out other banks.
The last thing is “what does ‘bailing out’ mean?” Shareholders of AIG were NOT bailed out. AIG stock price went from $1,500 to $25, or s 98% loss. http://www.marketwatch.com/investing/stock/AIG/charts?countryCode=US&submitted=true&intflavor=advanced&origurl=%2Ftools%2Fquotes%2Fintchart.asp&time=10&freq=1&comp=Enter%20Symbol(s)%3A&compidx=aaaaa~0&compind=aaaaa~0&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=1&optstyle=1013
That means if you had $1M invested in AIG, you now have $16K. That is plenty of “fiscal disciplining.”
If cactus cannot be back to reply due to personal reasons, maybe one of the other Bears can reply.
***The first thing I notice is that 7 of the 10 are foreign banks***
Fari enough. How do you tell a foreign bank from a US bank? The current iteration of the local bank where I opened a checking account a decade ago is now owned by the Royal Bank of Scotland. (And yes, that does make me a bit nervous). I think perhaps we need to stop thinking in terms of US companies vs foreign companies. Given the dispersion of facilities and stock ownership across the planet, we are apparently all global now.
***The second thing I notice is “wow, that totals only $14.2 B”***
The fact that it totals only 14.2B ought to be your first clue that it is probably the wrong number. In point of fact, AIG borrowed either 122.8B or 152B (I’m too lazy the figure out which is the correct number) from the government. That’s over and above the 14.2B (which may be 53B) paid out directly to counterparties by the government. I make the total somewhere between 136.2B and 205B if there isn’t another 100B or so in some other account that we are overlooking. http://en.wikipedia.org/wiki/American_International_Group
***went from $1,500 to $25, or s 98% loss” ***
It went to $1.25 and I’m not sure whether the government exercised it’s warrants to dilute the stock by 79.9%. They way AIG got back to $25 was a 20:1 reverse stock split. 1500 would be back before Greenburg and his board got into a fight and AIG got into serious legal trouble over stuff unrelated to weird CDSs? I think the price when the world’s financial system went over the cliff was around 400? I’m having trouble pulling up more than a year of price history and have run out of interest.
Would that we had done the same to GS, BoA, Citi, etc.
***The second thing I notice is “wow, that totals only $14.2 B” compared to Freddie and Fannie’s $400B or 28 times the amount, with 1/28 of the outrage.***
You’re comparing Capers to Watermelons. Freddie and Fannie deal pretty much directly in houses and housing backed securities. Even when many of the loans default, the building is still there and will eventually be sold. No way are Freddie and Fannie’s eventual losses going to be 100%. AIG on the other hand was writing “insurance”, i.e. was laying bets. Some of the bets are probably) covered by paper that will have some value, but who knows how much?
But you are correct, establishing FNMA and FHLMC as private companies rather than government agencies was a really dumb idea that worked out — as it deserved to — badly. The damn fools running the two operations turned out to be just as dumb, undisciplined, self-serving, and duplicitious as the rest of the financial community. Fortunately, they were a bit late to get into the competition to see who could make the stupidiest loans, so the operations appear to be a bit less badly off than some banks that are no longer with us.
I had put up this link on a post about a week ago. http://www.tavakolistructuredfinance.com/TSF56.html It provides a much better break down of the money involved and some interesting insights from a person who seems to know the details. Read it and weep.
Re: “I don’t remember what link I followed to get to this“
Maybe this one?:
“It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.
It’s destroyed any basis for fiscal discipline in the United States.”
Well, David gets this almost right. I’d put it at #2.
The single most drastic error in policy in modern history was Stockman’s brilliant, Machiavellian implementation of The Reaganomics Strategy. That’s #1.
And #1 led, ultimately to #2.
The fact that it totals only 14.2B ought to be your first clue that it is probably the wrong number
You are correct, in a way. My first link apparently talks about the CDS only, either that, or it’s the number the taxpayers actually paid out. The real number is higher, like $105 B. But most of that was paid out by AIG funds, which the Federal Government had to replace in exchange for buying the company, so it is a little convoluted. http://www.marketwatch.com/story/aig-details-105-billion-payouts-banks
Another “wow” moment for me when I heard Stockman interviewed on NPR. He was asked about the “starve the beast” approach to budget deficits and replied, approximately, that Democrats admit that we will need a mix of higher taxes and fiscal discipline, whereas Republicans “don’t acknowledge” the hard truth that there is no way we can get our debt situation in order without higher taxes.
It seems there is an “elephant in the room” — that during the naughties we grew “wealth” in the US on the backs of a couple $ trillion of borrowing, with net worth rising for the top tier of individuals, staying little-changed for the rest of individuals, while the public purse was emptied out. Those who enjoyed that increase in wealth reasonably want to keep the opportunity to have it grow even more, and so seem disinterested in acknowledging their share of the increase in debt. “It’s the entitlements, stupid.” Meanwhile, Labor and other lower-half of the economic strata also benefitted from low mortgage rates etc., but seemingly only allowed treading water against stagnant wages and rising unemployment. Stockman didn’t touch on the distributional aspects of the issue, but it’s right there.