9 ms·

The Real AIG Scandal

40 points by dpapathanasiou 18y ago

deleted 18y ago
[deleted]
lssndrdn 18y ago
I have been wondering some of the same questions. It seems like Goldman Sachs is one of the best-positioned large bank in this whole thing. Now they get to eat the cake and have it too? Am I missing something?
- Tangurena 18y ago
  Treasury Secretary Paulson was CEO of Goldman Sachs. He went to save his own buddies. http://en.wikipedia.org/wiki/Henry_Paulson http://en.wikipedia.org/wiki/Henry_Paulson
  - HSO 18y ago
    The timeline goes much longer, and the involvement much deeper. As for the timeline, former treasury secretaries Summers and Rubin were both at high-level positions at Goldman, Rubin actually was co-CEO. Then Friedman (his "co") who is Republican worked as chief advisor for Bush. Then Paulson, who as you said also was Goldman CEO. Now we got the Rubin people in there again, Geithner was his protege at treasury (as Rubin himself says in his autobiography) and Summers (now chief advisor to Obama) was Rubin's protege at Goldman. Note that Goldman paid out about 10 or 11 billion in 2008 for compensation, in the same year it received about the same sum officially (i.e. not counting the AIG shadow payments). Someone on a panel once said that if this same thing happened not in the US but some "developing" country, we would now hear big lectures about "crony capitalism". I used to admire Rubin and Goldman but this does not look good. This looks like Russian oligarchs, just in a richer country.
zurla 18y ago
yes. i've been disappointed that the controversy about the bonuses on the order of $200M have gotten more press and attention than the AIG bailout which is orders of magnitude more taxpayer dollars.
- padmanabhan01 18y ago
  One private company (AIG) insured 10 other private companies, and that one private company is now not in a position to honor the insurance policies. and now the Govt. on behalf of the public is giving money to that private company to save other companies. isn't this wrong in many levels? this is against capitalism, this is rewarding bad behavior, it is immoral - in the sense that Govt is taking money from Peter to pay Paul, this approach is not going to work on top of all this, I just feel this is just wrong.
  - mikedouglas 18y ago
    If you think the extent of AIGs insurance business was 10 companies, you're hugely mistaken. AIG is the backer of a huge number of corporate, state and municipal bonds. The usual terms of those bonds state that if the insurer fails, the bond becomes due right away. In a single day, we'd see a huge percentage of the solvent/proper economy just evaporate. AIG would take an enormous part of both the private and public economy with it, if it ever failed.
    - gnaritas 18y ago
      I like the idea that if a company is too big to be allowed to fail, then it's to big to be allowed to exist. After we recover, possibly if, companies like AIG that are single points of failure need to be broken up. I don't know if this is practical or not, but what if future regulation were aimed at limiting the total size/amount of money/whatever that a company is allowed to own with the goal of keeping risk distributed enough so that we wouldn't fear letting bad companies fail? They'd also have to monitor board membership and stock ownership to ensure you didn't end up with hundreds of companies being virtually one giant company behind the scenes all following the same bad policies. I'd imagine this isn't all that dissimilar to dealing with monopolies. Too little competition is bad and now we've learned that allowing any single point of failure is just as bad. As all hackers know, single points of failure are risky, even if a crash is unlikely. Our economies load needs to be better distributed.
gscott 18y ago
Through AIG banks could lend more since their investments were insured, so they didn't have to hold so much in reserve. Banks around the world used AIG so the AIG bailout is propping up banks everywhere, not just the US. AIG is on the hook for such a large sum of money, I can't imagine they can be bailed out forever. I am curious if AIG is writing more of the same contracts that took them down this path in the first place. I wouldn't be suprised if they are because the people behind this bailout believe deep down that CDO's and other similiar contracts are still good for the economy.
- smanek 18y ago
  The contracts themselves are good in principle, they were just executed stupidly (and the stupidness was rewarded with a bailout). But there is no reason that I shouldn't be allowed to sell you a guarantee that "X" won't happen (for any value of "X"). But, you are responsible for making sure that I'm liquid enough to pay in case "X" does happen - because if I'm not I'll just go bankrupt and you can try to claim your share of my assets just like everyone else. These sort of contracts help hedge risk - as long as they are done responsibly. When they are done irresponsibly, the involved parties should be made to suffer, not bailed out with tax payer funds.
  - joe_the_user 18y ago
    You mean that the contracts seem logical to you - when you just look at the relation between two companies. But you aren't really looking at the total effect of these contracts. Derivative contracts "spread risk" but, as we've seen, they don't avoid risk. So what they do is turn the individual risk of corporate bankruptcy into the risk of systemic collapse. That is called an "externality of production". Individual companies sometimes don't mind taking gambles that have a downside for people not otherwise involved with them. Much of governmental regulation is specifically for preventing these externalitie from impacting people - this is why banks are regulated, why companies must proper precautions handling toxic materials, why automobile drivers must have insurance, etc. So, ultimately, these kinds of contracts are bad. They need to be regulated in the same way that banks are regulated and for the same reasons.
jibiki 18y ago
It's a little off-topic, but does anyone else here feel like Spitzer kind of got a raw deal from the media?
- aristus 18y ago
  We'll probably never know, but the timing sure smelled fishy. Right before all the initial bailout drama, Spitzer gets taken down for paying for hookers with a credit card. Dirty little secrets like that are generally kept in reserve just in case you need someone out of the way.
- numair 18y ago
  How about NO... He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today -- all for what, a shot at becoming the next Giuliani? It's utterly retarded. He is the classic "bad cop" who is off doing shady crap in his free time, punishing perfectly good law-abiding citizens as part of his power trip. I mean, really, Hank Greenberg was the squeaky-cleanest guy you could find; yeah, there were the backroom deals and whatnot, but that's called "the old boys' club," and nothing that was severely impacting the fate of the global economy. Leaving AIG in the hands of Marty Sullivan and his gang of idiots, however... Well, we see what has happened; AIG is now so impotent that it is used as a mere pawn by the banks and the Fed. Spitzer practically shouldn't be allowed to write about this without acknowledging that he created the problem. The problem with politics is ... When Miley Cyrus says she will "ruin" Radiohead, we all laugh; when the Miley Cyruses of the political world say they are going to "ruin" someone, the power given to them by the people allows them to make inroads into doing just that.
  - jhancock 18y ago
    Can you please elaborate on two things: 1 - "Hank Greenberg was the squeaky-cleanest guy you could find" 2 - "He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today"
- deleted 18y ago
  [deleted]

deleted 18y ago

[deleted]

I have been wondering some of the same questions. It seems like Goldman Sachs is one of the best-positioned large bank in this whole thing. Now they get to eat the cake and have it too? Am I missing something?

Tangurena 18y ago
Treasury Secretary Paulson was CEO of Goldman Sachs. He went to save his own buddies. http://en.wikipedia.org/wiki/Henry_Paulson http://en.wikipedia.org/wiki/Henry_Paulson
- HSO 18y ago
  The timeline goes much longer, and the involvement much deeper. As for the timeline, former treasury secretaries Summers and Rubin were both at high-level positions at Goldman, Rubin actually was co-CEO. Then Friedman (his "co") who is Republican worked as chief advisor for Bush. Then Paulson, who as you said also was Goldman CEO. Now we got the Rubin people in there again, Geithner was his protege at treasury (as Rubin himself says in his autobiography) and Summers (now chief advisor to Obama) was Rubin's protege at Goldman. Note that Goldman paid out about 10 or 11 billion in 2008 for compensation, in the same year it received about the same sum officially (i.e. not counting the AIG shadow payments). Someone on a panel once said that if this same thing happened not in the US but some "developing" country, we would now hear big lectures about "crony capitalism". I used to admire Rubin and Goldman but this does not look good. This looks like Russian oligarchs, just in a richer country.

zurla 18y ago

yes. i've been disappointed that the controversy about the bonuses on the order of $200M have gotten more press and attention than the AIG bailout which is orders of magnitude more taxpayer dollars.

padmanabhan01 18y ago
One private company (AIG) insured 10 other private companies, and that one private company is now not in a position to honor the insurance policies. and now the Govt. on behalf of the public is giving money to that private company to save other companies. isn't this wrong in many levels? this is against capitalism, this is rewarding bad behavior, it is immoral - in the sense that Govt is taking money from Peter to pay Paul, this approach is not going to work on top of all this, I just feel this is just wrong.
- mikedouglas 18y ago
  If you think the extent of AIGs insurance business was 10 companies, you're hugely mistaken. AIG is the backer of a huge number of corporate, state and municipal bonds. The usual terms of those bonds state that if the insurer fails, the bond becomes due right away. In a single day, we'd see a huge percentage of the solvent/proper economy just evaporate. AIG would take an enormous part of both the private and public economy with it, if it ever failed.
  - gnaritas 18y ago
    I like the idea that if a company is too big to be allowed to fail, then it's to big to be allowed to exist. After we recover, possibly if, companies like AIG that are single points of failure need to be broken up. I don't know if this is practical or not, but what if future regulation were aimed at limiting the total size/amount of money/whatever that a company is allowed to own with the goal of keeping risk distributed enough so that we wouldn't fear letting bad companies fail? They'd also have to monitor board membership and stock ownership to ensure you didn't end up with hundreds of companies being virtually one giant company behind the scenes all following the same bad policies. I'd imagine this isn't all that dissimilar to dealing with monopolies. Too little competition is bad and now we've learned that allowing any single point of failure is just as bad. As all hackers know, single points of failure are risky, even if a crash is unlikely. Our economies load needs to be better distributed.

gscott 18y ago

Through AIG banks could lend more since their investments were insured, so they didn't have to hold so much in reserve. Banks around the world used AIG so the AIG bailout is propping up banks everywhere, not just the US. AIG is on the hook for such a large sum of money, I can't imagine they can be bailed out forever. I am curious if AIG is writing more of the same contracts that took them down this path in the first place. I wouldn't be suprised if they are because the people behind this bailout believe deep down that CDO's and other similiar contracts are still good for the economy.

smanek 18y ago
The contracts themselves are good in principle, they were just executed stupidly (and the stupidness was rewarded with a bailout). But there is no reason that I shouldn't be allowed to sell you a guarantee that "X" won't happen (for any value of "X"). But, you are responsible for making sure that I'm liquid enough to pay in case "X" does happen - because if I'm not I'll just go bankrupt and you can try to claim your share of my assets just like everyone else. These sort of contracts help hedge risk - as long as they are done responsibly. When they are done irresponsibly, the involved parties should be made to suffer, not bailed out with tax payer funds.
- joe_the_user 18y ago
  You mean that the contracts seem logical to you - when you just look at the relation between two companies. But you aren't really looking at the total effect of these contracts. Derivative contracts "spread risk" but, as we've seen, they don't avoid risk. So what they do is turn the individual risk of corporate bankruptcy into the risk of systemic collapse. That is called an "externality of production". Individual companies sometimes don't mind taking gambles that have a downside for people not otherwise involved with them. Much of governmental regulation is specifically for preventing these externalitie from impacting people - this is why banks are regulated, why companies must proper precautions handling toxic materials, why automobile drivers must have insurance, etc. So, ultimately, these kinds of contracts are bad. They need to be regulated in the same way that banks are regulated and for the same reasons.

jibiki 18y ago

It's a little off-topic, but does anyone else here feel like Spitzer kind of got a raw deal from the media?

aristus 18y ago
We'll probably never know, but the timing sure smelled fishy. Right before all the initial bailout drama, Spitzer gets taken down for paying for hookers with a credit card. Dirty little secrets like that are generally kept in reserve just in case you need someone out of the way.
numair 18y ago
How about NO... He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today -- all for what, a shot at becoming the next Giuliani? It's utterly retarded. He is the classic "bad cop" who is off doing shady crap in his free time, punishing perfectly good law-abiding citizens as part of his power trip. I mean, really, Hank Greenberg was the squeaky-cleanest guy you could find; yeah, there were the backroom deals and whatnot, but that's called "the old boys' club," and nothing that was severely impacting the fate of the global economy. Leaving AIG in the hands of Marty Sullivan and his gang of idiots, however... Well, we see what has happened; AIG is now so impotent that it is used as a mere pawn by the banks and the Fed. Spitzer practically shouldn't be allowed to write about this without acknowledging that he created the problem. The problem with politics is ... When Miley Cyrus says she will "ruin" Radiohead, we all laugh; when the Miley Cyruses of the political world say they are going to "ruin" someone, the power given to them by the people allows them to make inroads into doing just that.
- jhancock 18y ago
  Can you please elaborate on two things: 1 - "Hank Greenberg was the squeaky-cleanest guy you could find" 2 - "He ruined Hank Greenberg, one of the greatest businessmen in this country, and put AIG in the very position it is in today"
deleted 18y ago
[deleted]