Ponder this scenario:
Let’s say you owe me money. Lots of money. I need your money because I owe someone else lots of money. The person I owe lots of money has to meet several financial obligations of his own because he, you guessed it, also owes her and her people lots of money too.
If you find this confusing, you’re not alone. That’s exactly how American International Group (AIG) made the case to collect more than $100 billion in taxpayer funds to stay a float and attempt to avoid a chain reaction of events related to default insurance policies on terrible mortgage debt holdings. It nearly bankrupted the world’s largest full service insurer, financial services, and risk trading company.
The excuse that bailout apologists will offer time and again is that AIG was both too big and too intertwined in the American financial and economic system to fail without creating an “extinction level” social and economic event. Even now no one can give a straight answer on how it happened or what the bailout has meant. That is except for propping up AIG’s market liquidity and enriching AIG executives in the process. What?
That’s right. It’s that confusion that will continue to make this a politically contentious issue albeit with no resolution whatsoever except for the people at AIG “cashing out.”
Recently U.S. Treasury Secretary Timothy Geithner has found himself struggling to stem outrage in Congress over a round of bonuses for the same derivatives traders and financial executives that co-mingled trillions of dollars in ways so complex that it made a bailout absolutely necessary. Geithner, by the way, had previously helped secure an emergency loan for AIG when he was New York’s Federal Reserve Chairman.
Many argue that some of the funds that went to AIG should have gone to small businesses or to shoring up credit. That remains to be seen. The truth of the matter is that AIG’s bailout while sickening, is like a trip to the dentist when you haven’t brushed your teeth: painful but necessary. See also: necessarily painful.
The real tragedy from a political standpoint is that the government has no idea what the true scale of AIG’s past and future losses are and that AIG will be one of those dubious cases in American history where rewards are capitalized and failure is socialized.
The Catch-22 that Secretary Geithner, and other policy makers, face is that they have to respond to outcries about bonuses. Additionally, they must also help facilitate the sell of bad assets and of AIG business subsidiaries to create cash to pay American taxpayers back; and keep the company a growing concern so that it doesn’t fail and make matters worse.
We are stuck with AIG and with the policies surrounding it whether we like it or not. So the choices become:
a.) Don’t pay bonuses and watch them leave AIG with fat pockets and with the company in shambles; or
b.) Let them stay, pay them their money and also help bear a collective shamed.
When it comes to AIG no choice seems to be a good one. To date we still don’t know the extent of the toxic assets or what effects it will have on the economy in the future.
The problem with saying that something is too big to fail, is that you also have to admit that bailouts can also create insurmountable odds and endless possibilities that are in most cases to big to scale as well.