Sunday, March 22, 2009

Why I Don't Care about AIG: Outrage and Indifference

We live in hyperbolic times. Extreme reactions are the mode of the day. Everything is the "worst." Everyone has something to be angry about. Me? I couldn't care less.

This whole AIG mess is a disappointment, but it has been since Day One. In some ways it's like watching a friend with a drinking problem get himself into trouble again. Maybe you could be upset about it the first time something similar happened, but when you find out that he's used the money you lent him to buy more booze, you should not be surprised. Or outraged.

Who should I be angry with? AIG and the poor sap the government (we) put in charge? The government officials who "didn't realize" that they had bonuses to pay out? The derivative traders who took the irrational risks in the first place and got us into this whole mess? The new administration who wasn't even in place when we wrote the company the first check? Or Chris Dodd or Barney Frank?

None of them. I can't bring myself to be mad at any of them. Maybe it's because I have other things to worry about. Maybe because I think there are more fundamental problems with our economy than AIG paying out retention bonuses with our money. I now think we should never have got involved. Though there are problems in that.

The question in my mind is How big is too big to fail? Letting Lehman Bros go under spooked the market and we haven't yet recovered (I blame Hank Paulson for this--he, ex-Goldman Sachs, seemed happy to help out his friends, but when someone he didn't like was in trouble, he said "screw 'em"). So maybe letting AIG, who is responsible for insuring a lot of the debt out there, go under would be a bad idea. And I'll definitely agree that there's moral hazard in all of this. It leads to irrational risk taking. If I keep bailing my drunk friend out of jail, when does he ever learn to shape up?

Couldn't we have said that AIG was too big? Couldn't we have forced them to sell off or just dissolve the division that had put them in this position? Why just say, here you go, here's a big check, and in exchange we'll take a stake in this mess of a company?

But we haven't learned the 'too big to fail' lesson yet. When Merrill got into trouble, we pushed Bank of America into taking them, making them bigger in the process. I understood the theory for all of the bail outs at the time, but I'm ready for a little creative destruction. We have a banking and investment system that is all screwed up. They're all tangled up and twisted around, with no one paying for the risks they've taken.

And sure I could be mad at CNBC and all the cheerleaders telling us to buy and buy, all the people saying the market was going up so things must be great, the economy is strong while out in the real world things were turning sour. The media issue is separate. There should be no mistaking that CNBC or the Wall Street Journal is on the side of business. That's your mistake if you thought otherwise.

Really, I'm disappointed. One would have thought that someone would have realized earlier that using lent money to pay huge bonuses was not a good idea. One would have thought that taking a majority stake or any large stake would have given us a seat at the table. One would have thought that the government officials and legislators would have had the best interest of all of us in mind. One would have thought that there were people around who were smart enough to figure out how to get us out of this mess. One would have thought we'd have known better to believe any of this was true. I'm disappointed--with us.

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