AIG Bailout: A Model of Failed Government Intervention?

Public Administration Case Study: The AIG Bailout

First, AIG went to the US government to ask for a bailout under the justification that its failure might risk a "catastrophic collapse" for banks and money funds. (scare tactic)

Next, AIG receives the money and spends much of these on paying out or "rescuing" AIG counterparties...

courtesy of nicolasrapp.com

Then, they spent the part of the taxpayer's money as bonuses to the company's employees.

Apparently this caught the eyes of media which subsequently incited a mass hysteria against the "morality" of taxpayer shouldered largess...

Micheal Lewis of Bloomberg wrote of how the brouhaha over AIG's bonuses has obscured some simple truths. Excerpt below...

1) To the political process all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions....

2) As the financial crisis has evolved its moral has been simplified, grotesquely. In the beginning this crisis was messy. Wall Street financiers behaved horribly but so did ordinary Americans. Millions of people borrowed money they shouldn’t have borrowed and, not, typically, because they were duped or defrauded but because they were covetous and greedy: they wanted to own stuff they hadn’t earned the right to buy.

3) The complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently.

Be sure to read of the rest of the discerning article here

Lastly because of the furor, legislators rushed in to exact vengance...unfortunately by punishing the economy.

How? By licensing the abrogation of contracts, by passing retroactive taxation and by making taxation punitive.

This astute commentary from David Kotok of Cumberland Advisors (bold highlight mine),

``The result of this House action is already damaging. The federal regulator of Fannie Mae and Freddie Mac has shown the courage to ask that this law not be advanced in the Senate. We expect to hear more from those federal personalities who have the strength to speak up and oppose this House-approved proposal.

``But depending on the Senate to soften the law or depending on the US Supreme Court to overturn it is a dangerous strategy. Some Congressmen admitted privately that they voted in favor because of constituent pressure, even though they were really opposed to the concept. They voted “yes” because they were relying on the Senate or the courts to say “no.”

``Some damage is already done. Firms that were gearing up to participate in the federal program to be announced this coming week are considering withdrawal. They fear that any action which puts them into the federal assistance plan will subject them to the chance of retroactive punishment and taxation. The House has undermined the so-called public-private partnership designed to help restore financing of consumer items like automobiles and credit cards."

So those hoping for a quick economic recovery from the barrage of government intervention should see the reality-the visible hand has pernicious unintended effects.

Authorities appear to be immensely confounded by the clash of interests among various economic agents in the AIG dilemma: those being bailed out (e.g. AIG,'s CDS counterparties, bondholders, etc.), the unwitting participants (e.g. employees), the public (taxpayer money, mass hysteria/sentiment) and the economy (the passage of reactive populist laws that are business unfriendly).

Perhaps AIG's experience should be a paradigm of 'how NOT to bail out a company'...