Monday, November 10, 2008

AIG Is Begging for More

I have long contended that the $800 billion bailout of financial institutions would not be enough. By the time the process was finished, it would be closer to $1.5 trillion. There is more evidence of that contention in light of the fact that AIG is about to enjoy a "do over." You remember "do overs," where you got a bad roll of the dice when playing a board game and you beg your friends to let you go again. AIG has done the exact same thing, but there is much more than monopoly money at stake.

CNN Money notes that "troubled insurer American International Group got a reworked $152.5 billion deal from the federal government Monday, as the Federal Reserve and Treasury Department made significant changes to the terms of the company's original bailout."

"The Fed announced that it will reduce AIG's original $85 billion bridge loan to $60 billion, cut the interest rate by 5.5 percentage points and extend the borrowing period to five years from two years."

"In addition, the Treasury will use its special authority under last month's $700 billion bailout law - the so-called Troubled Asset Relief Program - to purchase $40 billion in preferred stock."

So the burden on the federal government is to make sure its new investment -- banking and insurance-- succeeds. This slaps "moral hazard" in the face because the government, which is suppose to be an impartial referee, now has a vested interest in this and the many other insurance and financial institutions in which it has invested our tax dollars.

The reality is, some of these businesses simply need to go under. The government should allow such with almost cruel fanfare. Get the business to the point where it appears it is about to get a check and pull the rug right from underneath it and declare "no more." It should declare that if the business is worthy of an influx of revenue, people would provide such in their stock purchases. If it isn't, it would let the market speak and send a loud message to all businesses that are beginning to see the government as a safety net.

If businesses can't fail, they have every incentive to reach ever newer levels of mediocrity. Failure is as important a function of free enterprise as is success. Failure teaches businesses and individuals how to do things better, it maintains competitiveness, and drives economic and technological progress. Bailouts undermine this important factors in business and economic success. It is time to hold these businesses accountable, close the pig troughs, and restore capitalism to our economy.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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Blogger Jason said...

The AIG bailout is small change and means nothing to the Fed. The Fed is transparent in that it is subject to the oversight of Congress. Is twice a year not fast enough? The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives.


10:11 PM  
Blogger Kevin Price said...

Considering that the portion of the money to AIG alone is bigger than the entire subsidy that went to the Saving and Loan industry in the 1980s, I don't know where one can call this "small change." Furthermore, the Federal Reserve Act was never intended to be a vehicle to subsidize business entities. The constitutionality of that act is suspicious, but was never intended to go to such lengths.

10:23 PM  

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