Today The Economist had a great article describing the need surrounding the revised AIG bailout. I assumed things at AIG had gone from bad to worse, prompting the government to react I just could not imagine a scenario that would cause such a lucrative government action (as I pointed out in my last article). I think The Economist describes the scenario nicely, and has the appropriate tone of how ridiculous things have become to result in a bailout of this size. In short AIG did not have the ability to repay the loan, and would have defaulted if the government did not act… again.
I find it ironic that this article describing the largest government bailout of any private company... ever, occurred on the same day the President made a speech (in the federal building on Wall Street) defending “American Capitalism”. The speech is not moving to any degree it has all the classic familiar President Bush elements including a 10 syllable limit per sentence, but you can find the full text here. For an excerpt, my favorite line completely out of context, “I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown.” Such a wise businessman leading our country!
There is one portion of the speech I want to focus on because it relates to AIG:
“Secondly, we must ensure that markets, firms, and financial products are properly regulated. For example, credit default swaps -- financial products that insure against potential losses -- should be processed through centralized clearinghouses instead of through unregulated, "over the counter" markets. By bringing greater stability to this large and important financial sector, we reduce the risk to our overall financial systems.” (note: I did not add the “” around "over the counter", it reads that way in the transcript, and I do not know what the president is referring to)
I am curious what the President (really the Treasury, I think we all know this is not the President’s idea) has in mind for this clearinghouse. The President insists it prudent not to over regulate but how will the government set up this clearinghouse? AIG’s business and sole purpose of existence was to assess the risk of a security and assign the proper insurance premium to account for the risk level. Is the President implying a government vehicle can somehow be more efficient than this market driven entity, because clearly AIG was doing something wrong. I leave this to a future announcement of possibly (hopefully) our next president.
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