(See also the rest of the five-part series)
As the administration releases the details of the latest version of the same old bailout pan, the furor over AIG continues to sound. With this first in a series of posts on the bailouts I want to present a basic depiction of AIG as the most typical of the corporate players in this crisis.
As innovator and as model AIG was the prototypical and core practicioner. It led the deregulatory charge. It was the ultimate buccaneer under Bush. It was the first to totter, the first to suffer a “systemic” meltdown, and was the real occasion for the foisting of Too Big To Fail on the public. It set the whole bailout program in motion. Every step of the way it was both one of the key players and the catalyst for the whole vicious system.
In a phrase which has spontaneously occurred to so many of us, AIG has been “ground zero for the practices which led the financial system to ruin” (this is the formulation of NYT columnist Joe Nocera). Nocera goes on to admit AIG was the starting point for the TBTF ideology: “The company is being kept alive precisely because it behaved so badly.” In a joint statement the Treasury and Fed, if not quite so morally honest, made the same point in defending the bailouts: “additional resources will help stabilize the company, and in doing so help stabilize the financial system”. Ben Bernanke was more menacing: “We have no choice but to stabilize [AIG] or else risk enormous impact, not just in the financial system but on the whole US economy”.
What is this uncanny operation? AIG was one of the world’s prestigious companies, proud bearer of a AAA rating, pillar of a respected industry. What went wrong, such that the name AIG is now mud, and this industry is reviled as the “FIRE trust”, as Michael Hudson put it in a typical formulation?
The basic answer is that AIG sold out its original business to become a deranged casino bettor. In furtherance of greed, ideology, and the apparent will to be reckless just for the thrill of it, AIG was at the core of an industry-wide anti-regulatory, anti-rule of law campaign. From 1990-2008 AIG contributed $9.3 million evenly among both sides of the Washington system, and spent another $70 million lobbying them. This modest amount bought a lot of anarchy, and by 2001 AIG had helped carve out a vast quarry of lawlessness to mine the structural and moral integrity of the system. To properly mix my metaphors, it was in this lawless space that AIG was able to set the charges which now threaten to blow the economy sky-high.
Although its practices weren’t uncommon, no one’s actions were so vast and reckless. Now as we stagger about the ruins of the finance world we keep receiving economic death threats: unless AIG, already one of the ultimate welfare recipients in American history (and perhaps the most contemptuously ungrateful), continues to receive ransom payments, it will destroy the American and global economy completely. (Nor is this just rhetoric, apparently. The NYT’s Andrew Sorkin, among others, has written that he believes AIG cadres, if not paid protection money, will intentionally crash the economy.) People are getting angry. Political and MSM apologists for AIG have had the nerve to criticize the public for its anger. But it’s AIG and its political, regulatory, and media enablers who have destroyed it, and who now threaten to bring down the whole system. It is they who are to blame for any level of public rage and direct action.
AIG was, a Tom Friedman put it, running “an unregulated hedge fund inside a AAA-rated insurance company”. It leveraged the moral authority of a AAA rating to get that rating conferred on the derivative paper chase as well. AIG and the banks conspired using “quant” phantasmagoria and this AAA tranche scam to evade regulation, to the point they could claim (plausibly, to those predisposed to coddle them) they didn’t need regulation at all.
AIG was involved in many unsound speculative activities, both recklessly leveraging itself and enabling the reckless leverage of every other player. But the core of its adventure was its credit default swap business. Banks and others holding mortgage-backed securities and collateralized debt obligations and god knows what else were keen to buy “insurance” on the value of these things. Eventually AIG wrote some $500 billion worth of this pseudo-insurance, providing the template for a $30 trillion build-up and eventual unravelling. In theory a CDS sounds like a good idea – a hedge against an adverse change in a changeably valued security. But under AIG the CDS had more lucrative, and dangerous, uses.
The first ulterior application was to enable banks to evade reserve requirements. This was an innovation of JP Morgan, and it seems CDSs were invented in the first place with this goal in mind. Having bought this insurance on their speculations, banks claimed they were no longer exposed to risk, and regulators acquiesced. Meanwhile, even as the banks said AIG was an insurer, AIG itself told those same regulators it was not, and they also agreed to this. Thus both AIG and the banks were let off the regulatory hook upon mutually exclusive rationales. This was the beginning of the lawless environment where the CDS nightmare was elaborated.
One of the key anti-regulatory goals the industry had was achieved in 2000 with the Commodity Futures Modernization Act, which declared CDSs off limits to regulators. Now the frontier really opened up. Joe Cassano, the head of AIG Financial Products, introduced several innovations. It became possible to place CDS bets with little or no collateral. AIG itself took the lead in betting monumental sums it could never possibly pay off. There was also an explosion of pure gambling, as buyers and sellers placed bets on underlying assets neither of them owned. The seller could take book on the same “naked” bet with any number of bettors. By multiplying “insurance” on the same risk, AIG was betting ever more ponderously vs. systemic risk, even as its very action was increasing that risk. This is the opposite of sound insurance practice. “They just bet massively long on the housing market”, an industry insider told Matt Taibbi of Rolling Stone.
Everyone was in on the CDS/MBS scam. Banks could shift risk and get out from under reserve requirements, while the AAA rating bestowed by AIG’s touch rendered the derivatives more lucrative. AIG collected the premiums. It could charge more by writing “collateral triggers” into its contracts, such that if the rating of AIG or the underlying securities were ever downgraded they’d have to post more collateral.
AIG knew it would quickly become insolvent the moment anything went wrong. The two factors which drove them on were greed and the ideological dogma that the housing market, and therefore the value of MBSs and CDOs, could only go up forever, and therefore the CDSs would never have to pay off. They regarded their own AAA rating as a law of nature, theirs by divine right.
This was the core theology of the whole finance bubble, of every finance bubble, of the bubble economy and society we now have. (That’s why we watch the administration continue to flail about trying to figure out a way to magically restore value to these derivatives, and beyond this to reflate the housing bubble. That’s the only idea they have, the only idea they could possibly have, since the American economy no longer has any basis other than bubbles. There’s no longer a stable foundation, only despair punctuated by gold rushes. Boom and bust.)
Nocera quotes former AIG exec Robert Arvanitis on AIG’s self-perception: “They never thought of it as abuse. They thought of themselves as satisfying their customers.” This is quite right. From the point of view of AIG, of TBTF, and of big capitalism in general, your only responsibilities are to yourself and (maybe) to your customers. The public, the public domain and public property, are just resources to be mined.
The CDS phenomenon was exemplary of the financialization of the global economy as a whole going back to the 70s. These practices, and the overarching economic structure, are not conventional value-adding capitalism at all, but simple atavistic rent-seeking. The deregulation-enabled casino capitalism which reached its frenetic pinnacle over the last decade, and which now through the bailout/loot conveyance seeks new avenues of plunder, has been history’s greatest manifestation of corporatism, not capitalism.
AIG began to unravel even before the housing bubble burst. As a result of its slovenly accounting culture, its rating was downgraded in 2005. In defiance of the eternal bubble dogma, this set off many of the collateral triggers. AIG responded by accelerating the writing of CDSs (in effect trying to “make it up on volume”). But soon its position deteriorated. It was bleeding red ink and in 9/08, facing another downgrade and another round of collateral calls, it couldn’t hang on. Big tough guy AIG cried for Mommy.
It was AIG’s interconnection with so many big financial players, in particular Goldman Sachs, which decided for Goldman cadre Henry Paulson that AIG had to be propped up with taxpayer money.The Bear Stearns failure was ad hoc and small enough to be dealt with summarily. Fannie Mae and Freddie Mac were formally public-private and therefore also considered atypical. Lehman was unloved and at any rate still considered an isolated failure.
But unlike in the case of Lehman, Goldman had a $20 billion exposure to AIG’s swaps. They were the most important of many big counterparties to AIG’s bets. Beyond this loomed the prospect of systemic collapse, given AIG’s myriad positions in the global economy. While Goldman and its gigantic colleagues, including several foreign banks, were paramount in Paulson’s calculations, he was able to whitewash his policy by citing AIG’s legitimate insurance business, all the individual policyholders, pensions, money markets, municipalities and so on who would be affected by an AIG collapse. As Taibbi put it, “the AIG bailout, in effect, was Goldman [Paulson] bailing out Goldman”. Or Nocera again: “the bailout of AIG is really a bailout of its trading partners”.
Paulson now invoked the specter of TBTF, and its counterpart Too Interconnected To Fail. he made no mention of AIG’s fat counterparties. The MSM, befuddled and credulous as always, and panicked by the stock market, was ready and eager to listen and obey. TBTF was now enshrined. Paulson and Bernanke were able to sound their call of “Stampede!”, everyone stampeded, and without even thinking about it we were locked into this “bailout” death march which looks more and more to be permanent.
At the time no mention was made that the main purpose of the AIG bailout was to launder taxpayer money to many of the same banks who were receiving direct conveyances through TARP. This double-dipping was treated as a national secret for six months by AIG and by both administrations until AIG finally had to cave in and release the names in March. This came after four AIG bailouts and counting. There’s no end in sight, nor does anyone in power have any concept of what an “end” might be, unless it is to be a permanent corporate welfare state for the finance industry.
So much for AIG’s historical role. It only remains for me to make a few comments on AIG’s character. AIG has long had a reputation for arrogance, loutishness, and a sense of entitlement. Now during the bailout we have seen these traits taken to psychopathic extremes.
When the lead architect of destruction Cassano was finally forced out early in 2008, he was kept on the books as a “consultant” at $1 million a month, where he would still be today if political pressure hadn’t forced them to drop him completely. There has been no explanation for why they kept paying him, any more than there can be an explanation for why anyone at AIG or any of these banks could ever think he or anyone else deserves a bonus. It can only be described in terms of psychopathy.
Being installed as the new bailout-era CEO, Edward Liddy declared his first priority would be to renegotiate the terms of the bailout to AIG’s advantage and the public’s disadvantage. He has been successful, with each subsequent bailout delivering more money to AIG at ever better terms for AIG and ever worse terms for the public, while rolling back the taxpayer protections of the previous bailouts. According to competitors, AIG has been leveraging its privileged position as a welfare queen to undercut competitors on premium rates. It can afford to do this since its existence, and lavish pay for its executives, is guaranteed by the federal government.
AIG was the first and the worst in the long line of miscreants among bailout recipients caught partying with taxpayer money at gilded age corporate “retreats”. It has been absolutely incorrigible regarding bonuses. It it now using taxpayer money to sue the taxpayers demanding a tax refund related to its offshore activities (themselves a evasion of American taxes) and the very accounting snafu which triggered its downfall in the first place.
It also recently circulated a veritable terrorist manifesto depicting in garish detail the economic horrors which would allegedly ensue if the bailouts don’t keep rolling in (and, implicitly, if anyone dares to question their executive pay). Thus they again take the lead, in waving the bloody flag of Too Big To Fail. (Getting back to Sorkin’s claim that AIG cadres, unless paid off, will go elsewhere and seek revenge upon the American economy while profiting from its destruction, and the contention that we need to pay protection to “retain” these people: if this is true, why are we giving them a choice at all? If this is a ticking time bomb scenario, and only the bomber can defuse the charge, would you coddle and beg him, and let him leave if he feels like it? Wouldn’t you make him defuse it, one way or another?)
In all of these cases when criticized AIG’s gut response has been defiance and contempt, and only under extreme duress have they ever changed their behavior. They clearly hate and despise the taxpayer whose largesse keeps them alive, and their favorite act is to laugh at the taxpayer. No doubt the very fact that they’re partying with taxpayer money provides a special titillation for them.
A word about AIG’s other holdings, which they’re now trying to sell off. In themselves these are typical. Ski resorts and soccer sponsorships: luxury items. International Lease Finance – large-scale airlines are another unviable, propped-up industry, now definitely doomed by Peak Oil. AIG owns or manages real estate holdings in 50+ countries. Here too they’re a major player in the FIRE trust. So we see how in their diversifications as well AIG is a top-heavy, unconstructive, counterproductive force wrecking civilization.
AIG’s efforts to sell off these things have been getting harder as they and the administration have seemed to connive at trashing the brand name and everything connected to it. AIG says the government will provide “backstop financing” for buyers in this asset selloff. (The government has been backstopping a lot lately ever since it backstopped the Bear purchase.) So here too it’s bailouts and lemon socialism for everyone. The buyer gets to buy cheap, and on the taxpayer dime, while AIG gets another disguised bailout.
This is above all a morality play. AIG is a simple acronym which stands for the turpitude of an ideology, an industry, a mode of organizing the economy, a way to arrange the priorities and practices of government and society. It stands for the complete failure of all of these, on rational, practical, and moral grounds. AIG and its CDS practice were not features of capitalism, but exemplary of the rentier character of the FIRE trust which has taken control of the world economy. America became entranced by the delusion of an ideology and faith in a business practice. When this ideology proved false and the practice failed, America was then terrorized with the specter of a complete economic collapse.
So now the people live under a double despair. They watch the economy unravel and their dreams for the future vaporize, even as they are terrorized with the threat that things will get far worse if they don’t meekly consent to the complete looting of the country in the form of a Bailout War, a class war from above, a war by the elites on the people. Thus the people come closer to serfdom with every passing day.
That’s why I regard the public outrage over the AIG bonuses as a positive sign. Whether or not the proximate cause warranted the rage, the rage itself is warranted and long overdue. AIG, by providing such a clear example of capital crime, easy to understand, and yet clearly indicative of the deepest, most fundamental truths, has ironically provided the occasion for the public to “leverage” its hitherto inchoate anger and confusion.
That the MSM and the administration have largely responded with disdainful lectures and demands for obedience to power just shows the bad faith of the administration and the craven, corrupted fecklessness of the media.
Let’s hope the public has the will to continue its education, to become more active rather than less, to maintain their anger and convert it to activist passion, toward organizing against this theft of our country, this theft of our future. It’s completely in the people’s hands, to let the crimes continue, or to put an end to them, take back the country, and rebuild the future.
http://www.globalresearch.ca/index.php?context=va&aid=12265 michael hudson
Volatility 
Nice summarization.
What do you make of the stories that AIG’s AAA insurance subsidiaries may not be all that AAA?
Comment by Daniel Hellerstein — March 24, 2009 @ 2:01 pm
Hi Daniel,
Thanks for being the first commenter at my blog. 🙂
I don’t know how sound their subsidiaries are. The life insurance branch is still profitable taken by itself, while general insurance, profitable until recently, has been getting hit with rising claims and all their profits from recent years were cancelled out. I imagine that’s only going to get more dicey with the climate crisis driving ever more extreme weather.
Beyond that, given AIG’s crazy business practices, it’s hard to see how anyone could be confident in the soundness of any one unit, that it’s somehow insulated from the broken whole.
(Then again, why would anyone trust the ratings agencies by now either! The whole system’s broken.)
Comment by Russ — March 24, 2009 @ 4:21 pm