Two of the most newsworthy aspects of the bailout are also the most misunderstood. AIG and the auto industry are both getting a lot of press and very little of it tells the whole story.
AIG- Why sustain this company?
AIG owns several subsidiaries, many of which market retirement plans and conservative investments. There are 2 million AIG policyholders in 130 countries who rely on the safekeeping of their investments. These are not people who decided they wanted to take a measure of risk and invest in the stock market. They are not risk investors at all. Most invested through AIG to save for retirement in fixed accounts and other low-risk vehicles.
Letting AIG fail means that millions of Americans who sought a low-risk retirement savings vehicle lose their nest egg because of mortgage derivatives that they have nothing to do with. This was not what they invested in and they are only guilty by association. The negative press that the AIG management has garnered in recent weeks may be deserved, but the policyholders are regular Americans who cannot risk a losing their retirement funds.
Detroit has a hand out
The auto industry would seem like another unlikely recipient. GM’s costs are 53% higher than Toyota. Is it any wonder they are up to their eyeballs in debt? There are a lot of people, with good reason, who would argue that bailing out an auto company is simply a mistake. They will point to the higher cost of doing business and the high labor costs incurred by the Big Three.
On the other hand, there is the domino effect that will be triggered if the American auto companies are left to fail. According to a FoxBusiness story, ‘one in every 10 U.S. jobs (is) related to auto manufacturing.’ Therein lies the problem. It’s not just the Big Three, but the thousands of companies around the country who depend on the health of the auto industry for their very existence.
The question of bailing out GM or AIG goes far beyond greedy executives or poor management decisions. The question is better phrased; do we allow millions of Americans to lose their incomes or retirement savings? The failure of the auto makers or AIG is far-reaching and impacts the American economy far beyond the scope of the bailout funds required.
November 13th, 2008 at 11:30 am
Great post. I will read your posts frequently. Added you to the RSS reader.
November 13th, 2008 at 11:45 am
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
November 13th, 2008 at 11:43 pm
I agree with the spirit of your comments, but some of your facts are a bit off as I understand them.
AIG’s insurance subsidiaries are highly regulated, solvent and still thriving. I understand this is also true of many of the plain vanilla subsidiaries and annuities. The company has many valuable businesses which continue to operate and dominate their fields. The bailout of AIG was really a bailout to Goldman Sachs, a firm which is widely reported to have purchased a substantial credit insurance from AIG’s unregulated parent firm. In addition to Goldman there were no doubt other hedge funds and investment banks, speculating on underlying garbage they did not understand. the shareholders would have taken a bath in bankruptcy, but even they would have recovered more in bankruptcy than under Paulson’s original bailout, from what I’ve read. Arguably, the only people bettered by the AIG bailout are the Treasury Secretary’s friends.
Once we’ve bailed out all of these investment banks I feel we have a moral imperative to do something about Detroit. After $140 billion for AIG, we cannot spare a comparatively measly $25 billion for Detroit? Come on. As I see it the reason Paulson wants to bail out “Main Street” through the banks is so the banks can continue to bleed what is left of our industrial heartland dry with usurious interest rates while they enjoy their taxpayer financed 5% gifts. Remember big banks have billions on the line from the boom days to Detroit, but if the Fed’s throws Detroit a small lifeline, the Big Three can continue to make payments to the banks on the more expensive loans they have outstanding. People should view any auto industry bailout as yet another bailout to the big banks.
How much longer can Congress bail out Wall Street and do nothing for Main Street?
The American people didn’t ask for these bank bailouts. Most of the public opposed it and Congress rejected their will. Instead, the Fed independently lent $2 billion to undisclosed recipients and Congress forged ahead with a $700 billion bailout anyway. Our government’s leaders talked down to the American people, telling us we would be in serious jepordy if nothing was done and acting as if the problem is too complex for the government to understand. Hogwash- the people most threatened by the failure of these institutions were other paper-pushing speculators caught up in a boom which has been a net destroyer of wealth. It is these financiers, not Detroit, who should suffer the fallout.
November 14th, 2008 at 7:05 pm
Alex,
You’re right…….the bailout is of the AIG holding company. Many of the subsidiary operations are considered to be solvent…..at least for now. The company had to issue statements to all of their policyholders asking them not to jump ship as they read the disconcerting news about the
company. Those solid subsidiaries could begin losing assets.
As someone who was in management with two of AIG’s subsidiaries many years ago, it is disconcerting to think of my former clients losing even one penny of their hard-earned savings. They were savers and not speculators.
November 26th, 2008 at 2:05 am
How many of the banks being bailed out issued mortgages to individuals who could not afford them? How many of these banks approved adjustable rate mortgages, fully knowing that the individuals could not handle the higher interest rates
when they would inevitably increase?
How many individuals knowingly obtained a low interest, adjustable rate loan and now are looking to the rest of us to pay their bills when the rates increased?
I have lost money in a tax sheltered annuity which is part of my retirement nest egg. Will the government bail me out?
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