The federal government gets sued for saving AIG

[Knowing]

If AIG was allowed to collapse, the world economy would be in a much worse place right now.

Then they were allowed to get too large in the first place. If any single entity in an industry failing puts the entire economic system at risk then the system has been made fragile by that entity and it needs to be broken up.

The alternative is capitalized gains and socialized losses, which isn't capitalism.

The number of FDIC insured banks has declined, while the assets commanded by those banks has more than doubled in the last 10 years. This means that a failure of one bank is less able to be softened by other market participants. Since that risk can't be distributed, we now have an industry environment where cascading failures are possible and a regulatory environment that encourages it while simultaneously offering an endless stream of money so that they don't.

My imagination is not sufficiently informed to even think of a system more dysfunctional than ours.

Without the possibility of failure, there is no capitalism.

 

[SMOGZINN]

Without the possibility of failure, there is no capitalism.

This right here. The most socialist thing this country has ever done is the bailout. We flat out broke capitalist system, but are still trying to pretend it works. Eventually it is all going to come crashing down around our heads.

 

[K1052]

This right here. The most socialist thing this country has ever done is the bailout. We flat out broke capitalist system, but are still trying to pretend it works. Eventually it is all going to come crashing down around our heads.

We tried it the other way in in 1929. The outcome was not favorable and resulted in the largest expansion of government power and social programs in the nation's history because when you have many millions of people in a desperate situation you can't just say "fuck you, it's capitalism" and be ok.

The government rightly stepped up in extraordinary circumstances to prevent the world's largest economy from imploding. The guys in the treasury and at the fed aren't communists or socialists (far from it) but they could see that doing nothing wasn't an alternative. In a vacuum it's great to say that people/companies should face consequences of failure but if the collateral damage is unthinkably bad then you are morally negligent in allowing it to happen.

 

[K1052]

I see nothing in the article about AIG suing the federal govt. I see that Mr Greenberg is suing as a shareholder, AIG isn't suing anyone, unless I'm just not reading it correctly.

Correct. This lawsuit is total garbage and even the most voracious finance guys I know think it's well beyond the pale. Greenberg is just an old greedy crank trying to get something he isn't entitled to.

 

[Atomic Playboy]

We tried it the other way in in 1929. The outcome was not favorable and resulted in the largest expansion of government power and social programs in the nation's history because when you have many millions of people in a desperate situation you can't just say "fuck you, it's capitalism" and be ok.

The government rightly stepped up in extraordinary circumstances to prevent the world's largest economy from imploding. The guys in the treasury and at the fed aren't communists or socialists (far from it) but they could see that doing nothing wasn't an alternative. In a vacuum it's great to say that people/companies should face consequences of failure but if the collateral damage is unthinkably bad then you are morally negligent in allowing it to happen.

Yes, but then we took all the laws that cropped up after the Great Depression to prevent that sort of thing from happening, said, meh, we'll make more money without these pesky regulations in the way, and then acted shocked when everything crashed and burned again. The problem isn't the bailout (which was needed), the problem was stripping out all the regulations and only stepping in when the inevitable self-correction of the market threatened to bankrupt our entire economy. Some people didn't learn from history... and those people are now impossibly wealthy at the expense of everyone else. That's a system that is set up to reward the wrong people. That's the problem.

 

[K1052]

Yes, but then we took all the laws that cropped up after the Great Depression to prevent that sort of thing from happening, said, meh, we'll make more money without these pesky regulations in the way, and then acted shocked when everything crashed and burned again. The problem isn't the bailout (which was needed), the problem was stripping out all the regulations and only stepping in when the inevitable self-correction of the market threatened to bankrupt our entire economy. Some people didn't learn from history... and those people are now impossibly wealthy at the expense of everyone else. That's a system that is set up to reward the wrong people. That's the problem.

Which is why I think very basic legislation should be passed that re-segregates the commercial banks from the investment ones and imposes strict capitalization standards/leverage limits. In addition to far more oversight on derivatives so some nut bag company like AIG can't bet the economy in a dice game.

My issue is with the people who think it would have been best for the government to sit back and let the world burn instead of bridging the gap.

 

[Anarchist420]

Which is why I think very basic legislation should be passed that re-segregates the commercial banks from the investment ones and imposes strict capitalization standards/leverage limits. In addition to far more oversight on derivatives so some nut bag company like AIG can't bet the economy in a dice game. My issue is with the people who think it would have been best for the government to sit back and let the world burn instead of bridging the gap.

I don't think glass-stegall would work if passed into law again. the banks would just withhold credit if it were passed again; so free market money may as well be legalized. repealing legal tender, taxes, and bans on private minting, and balancing the budget is the best idea. the banks should not have the govt's help in manipulating the money supply; market agents should be allowed to do that.

the problem with all the regs and legal tender is that they distort reality and cause malinvestment. for example my parents just don't know how to spend their money; they keep it all in the banking system while starting a new 20 year mortgage when their old 30 year one was going to paid off 6 years from now. No one should be forced to reward irresponsibility and banking/investment institutions under a central bank with legal tender are like wood chippers. A problem is that my parents are intimidated by taxes and see the USD as having intrinsic value, but a much bigger problem is that the govt keeps trying to correct mistakes it made in the past causing even more taxation and waste to fund.

I don't want my parents to lose their home, especially since I already want to die but i also don't want them to be so sure that going by what worked for them in the past will always work for them in the future.

If we had free banking, then uncertainties would be known about and likely to be resolved.

We tried it the other way in in 1929. The outcome was not favorable and resulted in the largest expansion of government power and social programs in the nation's history because when you have many millions of people in a desperate situation you can't just say "fuck you, it's capitalism" and be ok. The government rightly stepped up in extraordinary circumstances to prevent the world's largest economy from imploding. The guys in the treasury and at the fed aren't communists or socialists (far from it) but they could see that doing nothing wasn't an alternative. In a vacuum it's great to say that people/companies should face consequences of failure but if the collateral damage is unthinkably bad then you are morally negligent in allowing it to happen.

the problem was that Coolidge and Hoover were incompetent and FDR was incompetent as much as I am. IIRC, Coolidge once asked the Fed chairman at the time to end itself by raising the reserve ratio to 100% but then never asked Congress to do it. Hoover should've asked Congress to raise the gold reserve ratio for all banks to 100%, he should've balanced the budget each year, and not raised any tax rates (and he should've repealed all the tariffs). It was the perfect time to get the rid of the Fed. Doing all that would've been a much quicker and easier recovery than what FDR's Admin did; if you'll please remember, few were happy with the New Deal at first and most people didn't know what was going on.

 

[Charmonium]

Hank Greenberg wins - and loses. The appeal should be fun.

The weird thing is that Greenberg sort of won, even though the trial was called a comedy by some who were around in 2008. The court found that the government violated Section 13(3) of the Federal Reserve Act. Greenberg doesn't get any money, though.


The court says the government acted "improperly" by imposing such harsh terms on AIG when it bailed out the company before imposing less harsh terms on other companies it bailed out later in the crisis.


But the court can't really stop the government from doing that. Had there been no AIG bailout, there would be no company left, and the shareholders would have gotten $0 back in 2008.


Today they have more than $0 because of the bailout. Thus, the shareholders get no damages.

 

[dullard]

Simple. Just award him what he would be due if the government had not intervened.

Here is your check for $0.00.

We have a winner!

 

[GTaudiophile]

Too bad he and all his friends aren't rotting behind bars...or swinging under a tree...

 

[Blackjack200]

We have a winner!

I'll play devil's advocate. AIG, as I understand it, was solvent. In other words, their liabilities were good quality, they just couldn't cope with the liquidity crunch, a unique marketplace phenomena that the government tacitly acknowledged though their interventions.

While it's true that they would have gone under without government intervention, that' also true for a lot of other firms that received government assistance without such onerous terms.

I'll try to draw a crude analogy:

Lets say you have a house with a mortgage. You have a steady job, and assets in the bank. One month, the morgage comes due, but your bank goes belly up and you have no access to your money to pay it. You're going to lose the house before your FDIC insurance claim arrives. The government steps in and says "We'll provide temporary funding, but in exchange for doing so, we're going to take 80% of the equity you have in the house." With no other options, you take the deal.

Your neighbor is in the same situation, and gets the same deal from the government, but they only take 60% of his equity. Is that fair?

Too bad he and all his friends aren't rotting behind bars...or swinging under a tree...

That's fucking horrible.

 

[fskimospy]

I'll play devil's advocate. AIG, as I understand it, was solvent. In other words, their liabilities were good quality, they just couldn't cope with the liquidity crunch, a unique marketplace phenomena that the government tacitly acknowledged though their interventions.

It all depends on how you define 'solvent'. While I get the idea of assets >= debts = solvent, under many definitions 'solvent' means 'able to pay your debts'. If you can't pay your debts regardless of the reason, you aren't solvent, and AIG couldn't pay its debts.

While it's true that they would have gone under without government intervention, that' also true for a lot of other firms that received government assistance without such onerous terms.

I'll try to draw a crude analogy:

Lets say you have a house with a mortgage. You have a steady job, and assets in the bank. One month, the morgage comes due, but your bank goes belly up and you have no access to your money to pay it. You're going to lose the house before your FDIC insurance claim arrives. The government steps in and says "We'll provide temporary funding, but in exchange for doing so, we're going to take 80% of the equity you have in the house." With no other options, you take the deal.

Your neighbor is in the same situation, and gets the same deal from the government, but they only take 60% of his equity. Is that fair?

I agree that different firms got different terms, but these terms were negotiated under a great deal of economic pressure in a short period where the government had to make its best guess in a highly uncertain environment. AIG did represent an absolutely enormous risk on the government's part, considerably moreso than any other firm outside of the GSEs.

I don't know enough about the details to say if the government made the right decision, but I do think that people making those decisions in the heat of the moment need to be given some decent latitude.

 

[dullard]

Your neighbor is in the same situation, and gets the same deal from the government, but they only take 60% of his equity. Is that fair?

Business deals aren't about being fair. The price I paid for my vehicle is almost certainly not the price that someone else paid the next day for the exact same vehicle. The next person probably paid more than I did (I negotiate hard) but they could have paid less. Life isn't fair. AIG could have gone bankrupt instead.

That said, the judge did rule it as being not fair. The judge also ruled the damages to be $0.00. Hal2kilo called it exactly as the judge ruled half a year later.

 

[Charmonium]

Here's a great article from Motley Fool in 2008 that describes why AIG failed. What basically happened is that they were grossly over leveraged so their 'liquidity' crunch really became inevitable under the right conditions. Here's an excerpt.

Diworsifying
But AIG self-destructed not because it screwed up in its insurance business. It didn't fall into the trap of mispricing risk, as so many other insurers over the years have done. It also invested premiums fairly conservatively. So it followed Rules 1 and 2.
Where it slipped up was in Rule 3. See, the folks at AIG thought they were so smart at insurance that they could start other capital-markets businesses ... including proprietary asset management in things such as commodities, currencies, energy, interest rates, and the selling of default swaps on collateralized debt obligations (CDOs).
This strategy worked beautifully -- for a while. AIG created a separate business segment called Financial Services to trade in the aforementioned assets. This business had $204 billion in assets at year-end 2007, up from $60 billion in 1998.
Operating income surged from $900 million in 1998 to $4.4 billion in 2005. Some of the moves it made were brilliant, such as the purchase of ILFC, an aircraft-leasing business. But the other trading businesses were the Medusa that turned the whole company to stone.

 

[bshole]

Too bad he and all his friends aren't rotting behind bars...or swinging under a tree...

I love the idea of them hanging under a tree but I oppose the death penalty. I would settle for impoverishing every one of them. Take EVERY asset away from them and let them experience life as a poor person. If they can't find a job, put 'em on welfare.

 

[Blackjack200]

It all depends on how you define 'solvent'. While I get the idea of assets >= debts = solvent, under many definitions 'solvent' means 'able to pay your debts'. If you can't pay your debts regardless of the reason, you aren't solvent, and AIG couldn't pay its debts.

The distinction here is important. Lehman Brothers was insolvent, and that's why the the government did not intervene and let them go bankrupt.

AIG's bets were sound, and outside of an extraordinary liquidity crisis, they probably weather the recession. Financial firms use leverage and rely on short term capital to finance long term investments.

I agree that different firms got different terms, but these terms were negotiated under a great deal of economic pressure in a short period where the government had to make its best guess in a highly uncertain environment. AIG did represent an absolutely enormous risk on the government's part, considerably moreso than any other firm outside of the GSEs.

I don't know that I agree that AIG represented an enormous risk on the government's part. As I pointed out, and as Bernanke stated, the governmet examined AIG's book and found a healthy balance sheet. It could not function without short term capital, but I think "enormous risk" misses the mark.

I don't know enough about the details to say if the government made the right decision, but I do think that people making those decisions in the heat of the moment need to be given some decent latitude.

It might have been "heat of the moment", but it was not poorly considered. There is no way the US pledges $85 billion to AIG's counterparties unless they have a very good idea that the underlying business is sound.

Business deals aren't about being fair. The price I paid for my vehicle is almost certainly not the price that someone else paid the next day for the exact same vehicle. The next person probably paid more than I did (I negotiate hard) but they could have paid less. Life isn't fair. AIG could have gone bankrupt instead.

That said, the judge did rule it as being not fair. The judge also ruled the damages to be $0.00. Hal2kilo called it exactly as the judge ruled half a year later.

The government's financial supports were hardly "business deals" in that refusing any of them would have meant immediate bankrupcy for any of these firms.

I'm okay with a $0 reward. I'm just saying that I do think there is a legitimate point there.

 

[dainthomas]

There were no losses...AIG paid everything back including billions in interest. What more do you want...jail sentences for being stupid?

99% of people in jail are there for being stupid.

But I guess having the cash and connections to avoid jail sentences for torpedoing the economy and causing millions to lose their homes is the American Way.

 

[Fern]

The distinction here is important. Lehman Brothers was insolvent, and that's why the the government did not intervene and let them go bankrupt.
-snip-

Perhaps. I tend to think Lehman Bros was merely insufficiently 'connected'.

Now Goldman Sacks..... (look up how many are in high govt positions etc.)

GS got a $10 billion loan from Uncle Sam.

Goldman Sachs was among the eight large U.S. banks to receive the Treasury Department's initial round of capital investments -- money described by Treasury officials not as a bailout, but rather as funds to help bolster "healthy" banks in tough times.

https://projects.propublica.org/bailout/entities/237-goldman-sachs

I have no sympathy for Greenberg (nor think he has a case), but I don't think it fair that some got investments/loans from the govt while others who were as "healthy" did not.

Fern

 

[Blackjack200]

Perhaps. I tend to think Lehman Bros was merely insufficiently 'connected'.

Okay, but that can't be substantiated and thus can't really be argued. The government's claim that AIG was solvent is certainly bolstered by the return they got on their investment.

Now Goldman Sacks..... (look up how many are in high govt positions etc.)

GS got a $10 billion loan from Uncle Sam.



https://projects.propublica.org/bailout/entities/237-goldman-sachs

I have no sympathy for Greenberg (nor think he has a case), but I don't think it fair that some got investments/loans from the govt while others who were as "healthy" did not.

Fern

I don't disagree that there is too much movement between high level financial industry executive positions and high level government positions, but that's not really relavent to this discussion.

 

[Jhhnn]

Perhaps. I tend to think Lehman Bros was merely insufficiently 'connected'.

Now Goldman Sacks..... (look up how many are in high govt positions etc.)

GS got a $10 billion loan from Uncle Sam.



https://projects.propublica.org/bailout/entities/237-goldman-sachs

I have no sympathy for Greenberg (nor think he has a case), but I don't think it fair that some got investments/loans from the govt while others who were as "healthy" did not.

Fern

As I understand it, neither Goldman nor JPMC needed the bailout, having anticipated the market turn. They always had the revenue to maintain operation & they were on the winning side of the derivative deals. They & others were instrumental in the fall of Bear Stearns & Lehman, shorting them into the dirt, killing them in the Repo market where all banks must live to survive. When it came to the issue of saving the industry, the impression needed to be made that they were all in trouble, not that it was worsened by them preying on each other.

When Paulson told them to take the money, they dripped crocodile tears. When FRB lending was saving the bacon of other players, they took the cheap money, too- who wouldn't?- and used it for makin' bacon, big time.

We somehow find a way to not realize that every dollar AIG lost in derivatives was a dollar that somebody else won.

AIG isn't a bank, so the FRB at the time couldn't do anything for them. They were second class players. They set themselves up as the patsy with their own greed.

I'm glad to see the verdict. Sometimes, when you play, you gotta pay. Greenberg was lucky to escape with his hide attached.

 

[Charmonium]

As I understand it, neither Goldman nor JPMC needed the bailout, having anticipated the market turn. They always had the revenue to maintain operation & they were on the winning side of the derivative deals. They & others were instrumental in the fall of Bear Stearns & Lehman, shorting them into the dirt, killing them in the Repo market where all banks must live to survive. When it came to the issue of saving the industry, the impression needed to be made that they were all in trouble, not that it was worsened by them preying on each other.

That sounds like some revisionist history. GS stock crashed hard in 2008 and they had to go to Warren Buffett to get a $5B loan.

 

[Jhhnn]

That sounds like some revisionist history. GS stock crashed hard in 2008 and they had to go to Warren Buffett to get a $5B loan.

Paint it any way you want, but Goldman went to Buffet with a deal he couldn't resist- they offered to cut him in on the action & he accepted. Goldman posted record profits in 2009 after using Buffet to stave off short selling which they'd used themselves in the demise of Bear & Lehman. Buying into Goldman was one of the best deals Buffet ever made.

Like this-

http://moneymorning.com/2015/04/17/goldman-sachs-stock-price-cant-escape-volcker-rule-time-bomb/

 

[Charmonium]

Paint it any way you want, but Goldman went to Buffet with a deal he couldn't resist- they offered to cut him in on the action & he accepted. Goldman posted record profits in 2009 after using Buffet to stave off short selling which they'd used themselves in the demise of Bear & Lehman. Buying into Goldman was one of the best deals Buffet ever made.

Buffett took the deal because he dictated the terms to Goldman. You don't get to do that with a bank like GS unless they're desperate. I remember the news coverage at the time and the common theme was that the deal was a steal for Buffett.

 

[Jhhnn]

Buffett took the deal because he dictated the terms to Goldman. You don't get to do that with a bank like GS unless they're desperate. I remember the news coverage at the time and the common theme was that the deal was a steal for Buffett.

Pure speculation, then and now. Both parties profited immensely from the deal.

Goldman set it up like this-

http://www.businessinsider.com/the-trades-that-brought-down-aig-2012-10

The important thing to note is that these were synthetic derivatives, pure gambling. The potential downside for Goldman was limited, what they paid AIG for protection. The downside for AIG was being eaten alive by Goldman & others, which is exactly what happened. AIG bet the farm for a jingle in their pocket & lost.

I don't understand why we even allow such bets to be made with other people's money.

 

[Charmonium]

Pure speculation, then and now. Both parties profited immensely from the deal.

Goldman set it up like this-

http://www.businessinsider.com/the-trades-that-brought-down-aig-2012-10

The important thing to note is that these were synthetic derivatives, pure gambling. The potential downside for Goldman was limited, what they paid AIG for protection. The downside for AIG was being eaten alive by Goldman & others, which is exactly what happened. AIG bet the farm for a jingle in their pocket & lost.

I don't understand why we even allow such bets to be made with other people's money.

Maybe you'll believe this report from CNN Money.

But the legendary investor said his faith in the financial markets' recovery is contingent on Congress passing the $700 billion bailout, which would buy troubled mortgage assets from banks.
"If I didn't think the government was going to act, I would not be doing anything this week," Buffett told CNBC Wednesday morning. "It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. Last week will look like Nirvana if they don't do something."

In other words, Buffett wasn't going to touch GS with a 10 foot pole unless there was a bail out. No speculation here, just facts. If you can provide any sources to the contrary, please share.