Former AIG CEO Says Govn't Should Have Let It Fail

[Hubbs]

Just to ask the contrarian question... what did Bush, Paulson, and Bernanke have to gain in pulling off this con to "save" AIG?

If they honestly didn't think it would cause incredible economic damage and a horrendous domino effect why would they sabotage and dishearten their own party in such a drastic way in the midst of an election campaign?

They weren't pulling a con. They were simply acting on bad information. Look at how many mistakes have been made in the financial sector over the past few years, and then realize that the Treasury Department and Wall Street have an incredibly incestuous relationship when it comes to bigwigs moving back and forth.

[zoony]

Hubbs, I take it if you've been neck deep in this stuff, you've studied the Great Depresssion and the collapse of those financial institutions, and how that led to a domino effect where after a while banks had lines of common folk outside of them demanding their money, as a result of no-confidence. Bank Holidays and all that good stuff.

My grandmother kept her money in cash in her bedroom until she died, in 2006. She was around for it the first time.

If you don't think that having a dozen or more of our nation's largest financial institutions folding like a house of cards would have had the same effect, then quite frankly I don't think you know as much about it as you think you do.

But that's just the tip of the iceberg. Injecting capital into frozen credit markets and trying to keep the money supply moving is exactly what DIDN'T happen during the GD. And there are literally tens of thousands of the worlds' brightest PHD's from the greatest learning institutions known to world history who are saying the exact same thing.

I have no doubt that this pisses off Joe the plumber. But theres a reason Joe the plumber is a plumber, and not in charge of making decisions that directly effect the world economy. Because he's largely ignorant of such issues.

Where the danger comes in is when Joe the plumber thinks he knows something, and starts scouring the WWW looking for any tidbits of information that he can find to prop up his opinion that his tax dollars shouldn't go to financial bailouts. Knowledge without wisdom or context, dangerous combo.

[Elessar78]

I have yet to see one - one - specific explanation as to exactly how the big banks going into bankruptcy would cause the economy to collapse.

The 20 largest banks hold 90% of the deposits in the country (BoA and Citi by themselves account for 25%). The FDIC insures deposits up to $250K but if all these banks collapse I don't know how the FDIC can make good on all that. They'd go insolvent in a heartbeat. It's sort of a doomsday scenario, but wouldn't that mean that depositors' money would basically evaporate?

A lot of businesses, unfortunately, don't have a lot of cash reserves. They use lines of credit to make ends meet.

"Collapse" is too strong a word. That's a word the media uses, because it's loaded. But the economy would slow to a crawl for many many years.

[Prosperity]

Hubbs, I take it if you've been neck deep in this stuff, you've studied the Great Depresssion and the collapse of those financial institutions, and how that led to a domino effect where after a while banks had lines of common folk outside of them demanding their money, as a result of no-confidence. Bank Holidays and all that good stuff.

My grandmother kept her money in cash in her bedroom until she died, in 2006. She was around for it the first time.

If you don't think that having a dozen or more of our nation's largest financial institutions folding like a house of cards would have had the same effect, then quite frankly I don't think you know as much about it as you think you do.

But that's just the tip of the iceberg. Injecting capital into frozen credit markets and trying to keep the money supply moving is exactly what DIDN'T happen during the GD. And there are literally tens of thousands of the worlds' brightest PHD's from the greatest learning institutions known to world history who are saying the exact same thing.

I have no doubt that this pisses off Joe the plumber. But theres a reason Joe the plumber is a plumber, and not in charge of making decisions that directly effect the world economy. Because he's largely ignorant of such issues.

Where the danger comes in is when Joe the plumber thinks he knows something, and starts scouring the WWW looking for any tidbits of information that he can find to prop up his opinion that his tax dollars shouldn't go to financial bailouts. Knowledge without wisdom or context, dangerous combo.

excellent post, I can't add anything that hasn't been said... but I think it's obvious that if people see every major bank going into bankruptcy that they will take their money out of banks, stuff it in their mattresses and not use it. That unused money will be taken out of the economy. Obviously if people just take massive amounts of cash out of the economy then banks can't make loans so businesses can't be financed, means a lot of businesses will collapse directly from that, others will collapse because people are afraid to spend any money buying stuff... massive unemployment, deflation all the **** from the Great Depression. Furthermore, it would be much worse for the rest of the world, there would be serious wars.

[War Paint]

They should have let it fail. Bad companies should go out of business. In a true free market system, when bad companies fail, good companies can rise out of the ashes.

The whole bailout thing is nothing more than a power grab for government and bailing out the ones that created this whole mess in the first place. It's a disgrace.

[stevenaa]

The hell it would have. Merrill, Lehman, AIG, BoA, Citi, Sterns all fail, and you think those toxic assets could just dissapear in bankruptcy court and the good assets bought up by other firms? And the US Economy wouldn't collapse?

That's beyond myopic. I don't even think Hoover would have the stones to argue that one. All those firms becoming bankrupt in one sweep and we'd ALL be out of a job by now.

......

Bankruptcy does not equal out of buisness. What exactly is happening with those toxic assests now? They still haven't dissapeared. Houses are a collatoralized commodity. At some point, liquidation of these assests will make a big dent into the losses.

[Vicious]

If AIG is too big to fail it has to be sliced up so it can compete against itself and others. If it isn't too big to fail.. then it should have been allowed to fail.

[Elessar78]

What exactly is happening with those toxic assests now?

Toxic assets? We're talking about AIG. AIG's involvement in the economy has to do with credit default swaps (CDS), basically insurance on debt. Like any insurance, AIG was betting that not many would default on this insured debt, but they did. I think AIG insured the banks with this debt (probably Collateralized Debt Obligations) and so letting AIG fail would put these banks (and these are banks all over the world, not just in the US) at risk of failure. If banks are in trouble they stop lending to each other which and basically slowing down the global economy.

We're not just saving America, we're saving the world. Like we always do.

At some point, liquidation of these assests will make a big dent into the losses.

Not if they're still under their original value and banks have to sell them at a loss. Multiplied over many loans would render many banks insolvent still.

[IHOPSkins]

.....Merrill, Lehman, AIG, BoA, Citi, Sterns all fail, and you think those toxic assets could just dissapear in bankruptcy court and the good assets bought up by other firms?....

How about the "Bad Bank" Solution?

The Fed buys the Toxic Assets and holds them

That way the Gov helps BUT doesn't have CONTROL issues!!!

Hell, they might turn a PROFIT

That's beyond myopic.......

So is this Bailout Crisis Syndrome some seem to have here, "we have to do SOMETHING, AHHHHHHHHHH"

[IHOPSkins]

If AIG is too big to fail ......

At least we are TOLD that

Ask any of the EUROTRASH banks AIG Funnelled Bailout Money to

[zoony]

So is this Bailout Crisis Syndrome some seem to have here, "we have to do SOMETHING, AHHHHHHHHHH"

Well we do have to do something. :whoknows:

[IHOPSkins]

Well we do have to do something. :whoknows:

I agree

But passing a 10,000 page STIM PAC that wasn't even read was NOT the solution

[Hubbs]

Hubbs, I take it if you've been neck deep in this stuff, you've studied the Great Depresssion and the collapse of those financial institutions, and how that led to a domino effect where after a while banks had lines of common folk outside of them demanding their money, as a result of no-confidence. Bank Holidays and all that good stuff.

My grandmother kept her money in cash in her bedroom until she died, in 2006. She was around for it the first time.

If you don't think that having a dozen or more of our nation's largest financial institutions folding like a house of cards would have had the same effect, then quite frankly I don't think you know as much about it as you think you do.

But that's just the tip of the iceberg. Injecting capital into frozen credit markets and trying to keep the money supply moving is exactly what DIDN'T happen during the GD. And there are literally tens of thousands of the worlds' brightest PHD's from the greatest learning institutions known to world history who are saying the exact same thing.

You're correct that it didn't happen during the GD. Where you're incorrect is in your assumption that it would have prevented the Great Depression, or that it wold prevent this one. For the government to bail out the banks because of a sudden and severe drop in the value of certain assets is for the government to essentially pay for the previous value of those assets (regardless of whether or not the government actually takes over the assets). Where does the government get the money to do this? The only place it can get money - the rest of the economy. It's simply kicking the can down the road for a little while. Meanwhile, many of the fundamental adjustments needed in an economy that could fall into a depression of more than a decade aren't made. So the next time we hit the can as the effects of the taxes necessary to pay dramatically over-inflated prices for billions and billions in assets make their way through the economy, things might actually be worse.

(By the way, this is what many say happened in 2001, although in a different way than direct bailouts. The tech bubble popped, but the Fed's response of slashing interest rates combined with the change that allowed certain banks to lever at 35:1 instead of 12:1 on their loans allowed the bubble to essentially be "shifted" into the real estate market, which was already a sizable bubble all by itself. This began a massive inflation of that bubble for several years, during which more Credit Default Swaps on the housing market that "always goes up" were issued, more manufacturing jobs went overseas, and our national debt ballooned out of control. If the Fed and government had just stood pat in 2001, it probably would have been a significantly more painful year, along with a few after it. But we'd probably look back on it now as similar to the S&L recession, instead of staring another Great Depression in the face.)

I have no doubt that this pisses off Joe the plumber. But theres a reason Joe the plumber is a plumber, and not in charge of making decisions that directly effect the world economy. Because he's largely ignorant of such issues.

Where the danger comes in is when Joe the plumber thinks he knows something, and starts scouring the WWW looking for any tidbits of information that he can find to prop up his opinion that his tax dollars shouldn't go to financial bailouts. Knowledge without wisdom or context, dangerous combo.

Mods are so cute when they lob thinly-veiled insults at ordinary members.

[Hubbs]

The 20 largest banks hold 90% of the deposits in the country (BoA and Citi by themselves account for 25%). The FDIC insures deposits up to $250K but if all these banks collapse I don't know how the FDIC can make good on all that. They'd go insolvent in a heartbeat. It's sort of a doomsday scenario, but wouldn't that mean that depositors' money would basically evaporate?

A lot of businesses, unfortunately, don't have a lot of cash reserves. They use lines of credit to make ends meet.

"Collapse" is too strong a word. That's a word the media uses, because it's loaded. But the economy would slow to a crawl for many many years.

The FDIC's gonna either wind up going bankrupt or paying for virtually everyone's bank deposit anyway. That's the problem with bailouts. They don't actually solve any problems. If there were some sort of magical section of the economy that wasn't connected to anything else, and that section was threatening to bring the banks down, then I might eventually come to the conclusion that bailouts are a good idea once I examined the situation. But that's not how it works. Subprime real estate is connected to prime ARM real estate and commercial real estate, both of which have plummeted in value and both of which have yet to hit the market yet because those mortgages aren't on the same timing as the subprime mortgages were. That's gonna deal another huge blow to the banks. Are we gonna spend another couple trillion to bail them out of that jam, too? Then we have unemployment, which, while a lagging indicator, is still accelerating, meaning that there are more loan defaults of all types yet to come. Speaking of loans of all types, the numbers are getting worse and worse for the credit card market - do we bail them out, too? Should we keep bailing out the Big Three into perpetuity?

What you're talking about is a recipe for waking up one day and realizing that you've bailed out an entire depression. You can't do that. It's impossible. It means the whole system is being propped up by the government, which doesn't produce anything at all. If you want to see a house of cards even bigger than this one, that's the way to do it.

[Destino]

They should have let it fail. Bad companies should go out of business. In a true free market system, when bad companies fail, good companies can rise out of the ashes.

The whole bailout thing is nothing more than a power grab for government and bailing out the ones that created this whole mess in the first place. It's a disgrace.

It's funny how this situation puts right wingers at odds with thier own policy. The reason "too big to fail" exists and limits "true free market" is because corporations were allowed to get too much power. Face it. The system doesn't work if corporations get so large your nation depends on them doing business. Eventually those that pretend to favor the free market are going to come to terms with the fact that, the anti-corporate power wing of the liberals have had it right since Jefferson started their movement.

What happens 10-25 years or so from now when we are facing another economic slow down and all these companies are larger? When there are less banks that control everything? Do we let them fail then when we can't now?

[zoony]

Mods are so cute when they lob thinly-veiled insults at ordinary members.

ooh, bad move.

If you can't debate another member of ES without pouting and accusations of rule breaking where there wasn't any, perhaps you shouldn't be here to begin with.

There's really nothing worse than someone hiding behind the "you're a mod and you're insulting me" routine. That is scraping the very bottom of the barrel, really. Do you know how childish you sound?

Thankfully, you're not the first to go there. Which is why it's in the rules.

Take a 24 hour break. Continue to read ES rules until it sinks in. If they don't sink in, don't come back.

And here. Pay special attention to these parts.

And as you debate your fellow members, we request you maintain contact with the content of the discussion within each reply, regardless of how heated it may become. We, again, point to Rule 18 we have not enforced here in some time. Please follow the rules. And please appreciate the people who wrote them know them.

As a member, if you are engaged for a violation of the rules and happen to have expressed a viewpoint in opposition to that of the ES Staff, the engagement is due to an actual rule violation and not due to the content of the idea. The simple expression of our viewpoints that may be contrary to those of any member is not action against you and should not inspire charges of censorship. ES Staff members have an opinion they are allowed to express too

We're experiencing a recent surge in people who do not understand the meaning of the rules who continue to challenge whether the mods do. Any suggestion the people who wrote the rules and are asked to enforce them know them less than you will lead to an immediate temporary ban

[IHOPSkins]

.....The reason "too big to fail" exists and limits "true free market" is because corporations were allowed to get too much power.......

Nope

To big to fail is a line of Bull feed to Sheeple......Most bought it

But some of us think that life might just be bigger than a 10,000 page True/False quiz

Also

Your anti-free market rant needs to be tempered by this logic.....BAD regulation is WORSE than no regulation at all

[zoony]

Nope

To big to fail is a line of Bull feed to Sheeple......Most bought it

But some of us think that life might just be bigger than a 10,000 page True/False quiz

Also

Your anti-free market rant needs to be tempered by this logic.....BAD regulation is WORSE than no regulation at all

Count me in as one of the sheeple.

My only question I guess, is what is the play here? Why the need for deception? What's the bigger score here?

[IHOPSkins]

........what is the play here? Why the need for deception? What's the bigger score here?

Part of it was the relief of European Banks which would not be popular here.....

US Insurer AIG Funnels Billions from Bailout to European Banks

American International Group, once one of the world's most profitable insurers, recently required around $180 billion (139 billion euros) from the US government to stay afloat amid the global economic crisis.

But the firm revealed Sunday that more than $90 billion of the bailout package was paid out to other banks, including Goldman Sachs, Germany's Deutsche Bank, France's Societe Generale and the UK's Barclays.

"Using funds from the emergency loan, financial counterparties received … a total of $22.4 billion in collateral," AIG said in a statement.

Deutsche Bank was paid out $11.8 billion in total, France's Societe Generale received $11.9 billion and the UK's Barclays was given $8.5 billion. All three banks have declined to comment on the payouts.

http://www.dw-world.de/dw/article/0,,4101400,00.html

[zoony]

Part of it was the relief of European Banks which would not be popular here.....

]

Why? Again, what's the big picture here? Whats the greater conspiracy?

[IHOPSkins]

Why? Again, what's the big picture here? Whats the greater conspiracy?

What greater conspiracy have I argued?

I am talking about BAD an UNPOPULAR decisions (I should also talk about better regulation)

If you want to talk conspiracy...I would say that Obama is using this opportunity to Grow a Bigger and more Socialist government at a very fast rate....but I don't think I made that statement in this thread until now

If you mean Sheeple......

Fear was a way to motivate Sheeple

We heard HOPE before the election, now its all about CRISIS

Again I allude to the "WE NEED TO DO SOMETHING NOW" syndrome...its a sales technique

[The 12th Commandment]

What greater conspiracy have I argued?

I am talking about bad an UNPOPULAR decisions

If you want to talk conspiracy...I would say that Obama is using this opportunity to Grow a Bigger and more Socialist government at a very fast rate....but I don't think I made that statement in this thread until now

If you mean Sheeple......

Fear was a way to motivate Sheeple

We heard HOPE before the election, now its all about Crisis

Fear has been used pretty consistently by our politicians for the last 7 years.

I in no way belittle the horrible events of 9/11 but the threat from terrorism pales in comparison to another depression. Why is going after this current greater threat with a suitably different set of weapons and expenses different? Why should we not do everything we can to fight this horrible thing that may happen?

My take would be that the threat of a depression is not just manufactured for political gain any more than the terrorism threat was. The prospect scares them and they know a lot more of the intricacies than we do.

Particularly Hubbs and Zoon!

[Jumbo]

Mods are so cute when they lob thinly-veiled insults at ordinary members.

Then you'll love this: you're a real dip**** in this case, not to mention thin-skinned.

For the record, any staff member is entitled to the same latitude of conduct in exchanges as any other member (massive duh ) and zoony has certainly not come close to crossing any lines.

But you just did--by implying there is a status/role advantage or abuse being employed. You could even be banned under ruel 18 for it.

The proper (and safe) way to have said your comment would have been to leave that "mod" part, and any accompanying implications, out.

No mod has to "pay a penalty" of being passive, or mild, or not being as acerbic in common fashion and context as we allow all day long on ES.

The only real penalty "mods" have to pay for agreeing to do this work for free is how much time is spent on dealing with the typical menagerie of message board aficianados (i.e. *******s) of various stripe, because, unfortunately, they are often the ones that fall under the need to "officially" attend.

Let me say that I think you're a "fine poster" overall. My personal take on you as a member is more positive than not (which doesn't matter in any way other than conversationally and to give some context).

True, you sometimes strike me as another of the many folks here who (from notably to berserkly ) over-rate themselves, but that's cool, too.

I have seen you show the ability to laugh at yourself and "step back" and I think that's a very good trait. I also respect that you do possess aat least some genuine and valid knowledge on certain topics, including economics and finance (as does zoony). That's always a nice thing in the tailgate.

Carry on.

[IHOPSkins]

......Why should we not do everything we can to fight this horrible thing that may happen?

My take would be that the threat of a depression is not just manufactured for political gain any more than the terrorism threat was. The prospect scares them and they know a lot more of the intricacies than we do....

There is a serious problem

But

Did your confidence go UP when you found out congress didn't even READ the STIM PAC?

Did it Further continue to raise when Obama admitted what he voted for needed MORE controls and that $$$$ was not going were planned?

Did we have transparency concerning the AIG bailout money going to EUROPE?

Doing "anything" fast does NOT necessarily equal doing something right....in Fact it Could make the situation WORSE

IE the AIG Bonus Boondoggle

[The 12th Commandment]

There is a serious problem

But

Did your confidence go UP when you found out congress didn't even READ the STIM PAC?

Did it Further continue to raise when Obama admitted what he voted for needed MORE controls and that $$$$ was not going were planned?

Did we have transparency concerning the AIG bailout money going to EUROPE?

Doing "anything" fast does NOT necessarily equal doing something right....in Fact it Could make the situation WORSE

IE the AIG Bonus Boondoggle

I think AIG amounted to about 180 million out of what, 2.something trillion? Mistakes will happen (and I was pissed at that one as much as anybody) and they did in the past as well. Embarrassing and stupid, yes, but not even close to the level of some of the mistakes made in the war on terror.

I hate to beat a dead horse but the WMD thing is the first that comes to mind. And that was pretty expensive in terms of money and lives. But the point is that's what we were told and it was perceived as a real threat and we went at it full bore. How is that different than a potential implosion of our economy?

Sometimes fast is necessary and a cost might be attached to that speed, but almost every time there's a cost with inaction or sloth too. And it's usually a lot steeper if the threat is real. I think we've already agreed that the evidence supports that the economy is a real threat and not made up.