We had spring break last week, so I’ve been a bit absent from the blog. No fears, we’ll make up for it.
I know much ink has already been spilled on the AIG bonuses, but let me add just one thought. AIG had contracts with executives to pay them bonuses even though many of those executives made catastrophically bad decisions. AIG also had derivative contracts with other financial companies, including Goldman Sachs, even though those companies never fully considered the risk that AIG would be unable to pay. Of course, if AIG went bankrupt, then all of its contracts would be nullified and everyone would have to get in line to see if they would be paid anything. But we didn’t want AIG to break its contracts with Goldman, et al for fear that it would spread a panic, so the public assumed AIG’s obligations and guaranteed Goldman, et al every penny.
Why should Congress be any more outraged over AIG keeping its contracts with its own executives to pay bonuses than keeping its contracts with Goldman et al to pay for bad mortgage bets? The bonuses only cost us $163 million while the Goldman et al contracts cost us tens of billions. And the Goldman et al executives were as guilty of gross miscalculation in failing to properly consider counter-party risk as the AIG executives were guilty of writing bad derivative contracts.
As much as I hate to say it, I have to agree with Paul Krugman that the Obamaadministration appears to love Wall Street fat cats. They love those fat cats at least as much as the Bush Administration.
Let’s take a look at the new Geithner plan to count the ways. The plan creates as many as 5 entities in which the Treasury and private investors put in an equal amount of capital, totalling about $150-$200 billion. Those entities can then borrow as much as 6 times that amount, or a total of about $1 trillion, from the FDIC (another branch of the government). Those would be non-recourse loans, meaning that private investors would have no more than $75 to $100 billion on the line and could not lose more. Meanwhile they get to buy $1 trillion of assets with highly subsidized loans and almost no down-side. No wonder the stock market loved this. It’s a great big smooch from the Obama administration.
One of the supposed benefits of this plan is that it will create a “market price” for the currently illiquid “toxic assets.” But of course the price that this will establish will be a phony one from a market with five selected bidders playing with the government’s money at highly subsidized rates. This mechanism sets market prices about as well as handing my kids ten bucks and letting them loose at a flea market.
And if this whole deal is fair, how about if they let me and other individual investors buy shares in these 5 joint ventures. I’d like to own a piece of a game where I gamble with the government’s money and can experience 1/12 of the losses.
Posted by Jay P. Greene 
Jay P. Greene's Blog 