Why The AIG Bailout Is Not Like Chrysler
Tuesday night, the Federal Reserve provided an $85 billion line of credit (otherwise known as a loan) to AIG, backed by the US treasury. AIG is the largest insurance company in the country and one of the largest financial firms in the world. In exchange, taxpayers get 80% of the company, and AIG's management gets the boot.
The differences are enormous. There is no precedent for what the US Treasury Department and the Fed did Tuesday night.
- Scale: In today's dollars, the loan guarantee for Chrysler would be about $4 billion. The AIG bailout is 20 times larger.
- Instrument: In the Chrysler bailout, the government guaranteed private loans ... and required that Chrysler come up with other loans and/or cost savings measures. In the AIG bailout, the loan is coming directly from the Fed, guaranteed by the US Treasury.
- Ownership: Taxpayers had no ownership or managerial control with Chrysler. We do with AIG. Moreover, we "have the right to stop payments of dividends to shareholders."
- Authority: Congress had to write legislation authorizing the Chrysler bailout. The Fed chair and Treasury Secretary seem to have acted with carte blanche, courtesy Section 13(3) of the Federal Reserve Act. (There are no quotes from the President in the stories I've read so far, and while there are protests from Senate banking committee members and the Speaker of the House, those protests don't argue that the White House needs Congressional approval.)
- Global Impact: Had Chrysler gone bankrupt in 1980, the main folks hurt would have been vendors and employees. Although there would have been a global impact, it would have been small. With AIG, with assets of $1 trillion, however, failure would impact 401Ks and other retirement plans ... as well as people and businesses around the world. European banks own three-quarters of the $441 billion in unregulated complex security instruments protected by AIG. Moreover, "had AIG gone into bankruptcy, the financial industry would have faced losses of up to $180 billion."
Both firms got caught by poor management decisions, but it's AIG that reflects a much bigger problem: America buys more than it produces (imbalance of trade) and is spending a heck of a lot of its cold hard cash on imported petroleum.
Where they are all too much alike is in the arena of government regulation, or, more accurately, deregulation. Just as automakers fought efforts to develop strict CAFE standards, the financial sector has argued that those Depression-era constraints on co-mingling banking, finance and insurance were simply too behind the times for the digital age.
What can you do?
Get to know presidential candidate positions on the economy. This article at The Moderate Voice is a good start as is this overview by Kimberly Amadeo.
Talk to your Congressmen about the tax code. Too often, the tax code encourages spending rather than encourages saving. We need to save more; our savings rate is the lowest in the developed world. And the argument that we're "saving" by building equity in our homes has been rendered moot, blown away like the house owned by the first of the three little pigs.
Talk to your Congressmen about the debt and the deficit ... and about the $2 trillion Congress has moved from the Social Security trust fund to the general fund, with no plan for paying it back.
Work at paying off your debt, if you haven't already done so. Unfortunately, few of us are considered "too big to fail," especially after Congress changed personal bankruptcy laws at the request of, you guessed it, the financial sector.