- Home
- News Grid
- Local News
- Green Hawk
- Business
- Politics
- School Zone
- Nonprofits
- Missing Pets
- Multimedia
- Arts
- Movies
- Outdoors
- Sports
- News Releases
- Columnists
- Blogs
- Opinions
- Classifieds
- Advertise
- Donate
- Partners
Larry Kudlow: AIG Debacle Ignites Firestorm of Outrage
This whole AIG fiasco — where the entire political class is suddenly screaming over bonuses paid to derivative traders in AIG’s financial-products division — is just a complete farce. What it really shows is how the government has completely bungled the AIG takeover. Blame the Bush administration and the Obama administration. It also shows, once again, why the government shouldn’t run anything, because it cannot run anything.
AIG should have been placed in bankruptcy last fall under some sort of government sponsorship. While in bankruptcy, all the salary contracts (and every other AIG contract) would have been nullified and voided. At the same time, there would have been an orderly liquidation and sale of AIG’s assets and separate divisions.
But as things stand now, there still is no clear roadmap for the dissolution of AIG. There are ideas, but nothing is set in concrete.
And as for the $165 million or so in AIG bonus payments, the Obama administration — including President Obama, Treasury man Timothy Geithner and economic adviser Larry Summers — knew all about them many months ago. They were undoubtedly informed of this during the White House transition.
So there’s no big surprise. Nobody should be shocked. But Obama is doing his best play-acting ever. He knows full well that the nationwide outcry against federal bailouts and takeovers is only going to get worse on his watch. His poll numbers are already falling, and this AIG episode is going to pull them down more.
Incidentally, has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won’t cram down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don’t you think?
The Wall Street Journal editors get it right when they ask: Who’s in charge, and what’s the game plan? The whole AIG story is an outrage.
What’s more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we’re going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?
And what is Treasury man Geithner’s role in all this? He appears to be the biggest bungler in what has become a massive bungling. My CNBC friend and colleague Charlie Gasparino thinks Geithner can’t survive this. I am inclined to agree.
Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.
Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.
Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.
Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away, and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.
In a column last week, I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.
We don’t need more TARP. We don’t need to take over more big banks. And we don’t need to have the government run things it simply isn’t capable of running.
Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.
Comments
Noozhawk's comments are moderated, but by posting here you accept your responsibility to follow our rules as part of Noozhawk's shared online community. Please keep your comments civil and helpful. Don't attack other readers personally, and do not use vulgar, abusive or discriminatory language. Use the "Report Abuse" link if a comment violates these standards or our Terms of Use.
» on 03.19.09 @ 12:47 PM
But Larry - don’t you understand that the anti-Bush is omniscient, omnipotent and knows better than everyone else? How can you make such rash judgments, you have to give Him a chance. The sad part is that the economy will recover in spite of Him carrying on the same financial give-away policies as Bush and He will of course take credit and give Bush the blame and nobody will be the wiser…and we will be stuck with all of the new socialist programs He managed to sneak in under the guise of saving us all.
You don't have permission to flag this entry.
» on 03.20.09 @ 09:29 AM
Mr. Kudlow is mostly right, as far as what he discusses.
If we go past that, he is mostly silent about the conscious non-regulatory attitude and rampant conflicts of interest which pervaded Bush’s presidency.
This is not about Bush I, Clinton, Bush II, Obama.
It’s about a whole welter of federal agencies and senior officials who consciously turned a blind eye when AIG began to set up an offshore (London office) “credit default swaps” hedge fund, hidden behind AIG’s international, omnifold business status.
That high-risk action, far beyond AIG’s corporate charter, not only deliberately pushed AIG into unregulated/under-regulated deep water, but led to actions that would have drowned AIG, had Bush II’s team not intervened at the last minute to keep it alive ... at gigantic public subsidy cost.
As the Wall Street Journal pointed out, their principal reason for doing this was
not a desire to protect AIG (and its shareholders), but a realization that the result
of their hands-off, free market approach to Wall Street, was that a numerous large
international financial institutions had justified their own high-risk investment mania with the hedge that all their transactions were “fully insured by AIG.”
When it turned out that AIG’s imprudent speculations had threatened to bankrupt
AIG, it also meant that AIG would not have resources or credit to redeem the “risk policies” all the major financial institutions had bought from them, and that might have caused all those institutions to topple into insolvency too.
So while Kudlow is mostly correct, his attempt to politicize what’s really a classic
“bubble” investment mania is misdirected.
Most of the regulatory firewalls set up from FDR’s time, forward, were intended to prevent the kinds of messes that AIG, GoldmanSachs, Citigroup, BofA, et al., have dragged us into.
That was able to take place only because majorities in Congress, and administration leaders from the 2nd Clinton term through Bush II’s two terms, encouraged it to.
If AIG executives are being urged to “voluntarily return” half their 2008 bonuses,
why don’t we urge Greenspan, Gramm, Summers, Paulson, Geithner, Bernanke, and ALL members of Congress in office since 2000, to do likewise?
They all looked right at the beast, blinked, and dropped the ball. We will be paying the tab for their errors for the rest of our lives. Shouldn’t they pay, too?
You don't have permission to flag this entry.
More Local News »
Larry Kudlow: Romney’s Attack on Crony Capitalism
The Republican presidential candidate is saying all the right stuff — is anyone listening?
Larry Kudlow: Stocks Get By with a Little Help From Our Fed
U.S. makes it cheaper for Europe to borrow dollars, but there are bigger problems yet to be solved
Larry Kudlow: A Super Tax Hike Would Spell Disaster
For now it makes sense to fall back on across-the-board spending cuts
Larry Kudlow: Modest Gains on Job Front Not Nearly Enough
Congress must be mindful of the tax and regulatory barriers that continue to impede the economy
Larry Kudlow: No Armageddon, But No Economic Victory Yet
Unemployment is down and incomes are up, but we're still way off where we should be
Weather: Fair with Haze 58.0º
Search Noozhawk »
