Wednesday, May 23 , 2018, 5:35 am | Overcast 57º


The Daily Capitalist: Politicians Flee Fallout from AIG Scheme They Created

The Cirque du Politique comes to town, with the same old clowns singing a different tune this time

This AIG bonus hoopla is fun to watch, maddening from all angles, but good low entertainment. Until you think about it. It reveals the problem of letting politicians run anything. We’ve given AIG $173.3 billion and they are yelling about $135 million of bonus money. No one seems to be yelling about the $173.3 billion.

The level of outrage comes from both sides of the aisle, but Republicans are especially indignant. We have to hear Sen. Charles Grassley, R-Iowa, say the guilty parties should bow in shame, give the money back, and kill themselves. “Just kiddin’,” he says later.

At first there was denial from the Obama administration. Treasury Secretary Timothy Geithner says he wasn’t aware of the bonuses, then he backtracked in a hurry when it turned out he was involved from the beginning of the AIG bailout as president of the New York Fed. Now he says he takes full responsibility and the pundits are taking bets on how long he’ll last.

Sen. Chris Dodd, D-Conn., offers the most entertainment after it turns out he was among those responsible for permitting the bonuses. “I agreed reluctantly,” Dodd said. “I was changing the amendment because others were insistent.” His opponents are justifiably piling on. AIG paid Dodd $281,000 as campaign contributions.

When it is realized that the bonuses are legally binding on AIG, the House of Representatives hastily passed a confiscatory tax bill in an attempt to get the money back. This raises constitutional issues; specifically the tax may violate the Bill of Attainder, which says you can’t pass a bill to punish someone for something they’ve already done. I learned about it in my law school constitutional law class. Most people in Congress are lawyers and, of course, are aware of this.

AIG CEO Edward Liddy says the bonuses were necessary to retain key employees in the structured financial products division in London to wind down their credit default swap book. Without them the damage could be worse and more expensive for taxpayers. He notes that the bonus contracts are legally enforceable.

Here are a half-dozen points:

1. We shouldn’t be bailing out AIG anyway. As Jim Rogers said, “it is better that AIG goes bankrupt and we have a horrible two or three years than that the whole U.S. goes bankrupt.”

2. The Japanese tried bailouts and it didn’t work. They propped up bankrupt companies like AIG and business activity collapsed. They called them “zombie” companies. AIG is a bankrupt zombie company.

3. Whether or not we bail out AIG it has breakup value. That is, the parts of its business that are still profitable are valuable and healthy insurers are waiting to buy them. The government’s bailout has hindered this process. Why would anyone buy the structured financial products division that sold all the credit default swaps that the government claims makes them too big to fail? This seems to be a dead business because of the faulty risk models used to underwrite the risk of these instruments. The government also claims it will heavily regulate this market to prevent “systemic risk,” which, if that is the case, means the good old days are over for these guys anyway. So, why retain employees for a failed business plan?

4. The confiscatory tax is not a good message to be sending to struggling businesses. True, if you didn’t take more than $5 billion of TARP money, you don’t have to worry. But there is a populist sentiment that worries a lot of people about how far government will go to regulate businesses. Is this what we want to do to keep companies in the U.S.A.?

5. It is rather disturbing to see politicians and commentators demand that AIG break a legally enforceable contract. If this were done by anyone else, they would be sued for interference with contract. I guess I already said most politicians are lawyers and know this.

6. The key politicians who are outraged are aware of all these above points which makes them hypocrites. Shocked you are, I am sure, to discover this fact. The confiscatory tax bill will be quietly shelved and go away when it reaches the Senate. It’s political fiddling while they are burning our house down.

Why do we take these people seriously?

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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