How the Masters of the Universe got that way

By Michael Fraase

Tuesday, 11 November 2008 09:18PM CST

Section: Business

Freakout dollarLast September, the US Federal Reserve Board bailed out American International Group (AIG) to the tune of US$85 billion. In return, the US citizenry received 80% of the company. This was one of those “too big to fail” deals.

Here’s how the New York Times explained the reasoning behind the bailout:

“If AIG had collapsed—and been unable to pay all of its insurance claims—institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with AIG securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.”

Um, isn’t that how it’s supposed to work? When you make a bad investment, you take the loss—you can bet your ass that the individual AIG investors have already taken their losses. Insurance is another matter entirely of course, but as the Times stated, there are protections already in place for AIG policy holders. Because the value of investments in AIG are not being reset, the Federal Reserve has done nothing to prevent this from happening again. Worse, there’s nothing being done to address the “too big to fail” issue. If an entity is too big to fail it’s too big to exist. Pretty simple—not exactly rocket science.

Oh, but we’re not done yet. Not hardly.

A month later, the US government increased the AIG bailout with an additional US$38 billion. Because the initial US$85 billion wasn’t enough. Once again, the US citizenry received additional stock in the company. If US$85 billion got us 80%, figure another US$38 billion got us an additional 40% or so.

On Monday, the Times reported that the US government would buy US$40 billion of AIG stock, “after signs that the initial bailout was putting too much strain on the company.” Too much strain? What does that mean, exactly? AIG was finding it too difficult to spend that much money so quickly, or what?

Oh, but we’re still not done.

Washington Post reporter Amit Paley wrote Monday that in the middle of the Bush administration US$700 billion banking industry bailout last September, “the Treasury Department issued a five-sentence notice that attracted almost no public attention.” The administration had given US banks a tax windfall of US$140 billion.

Members of the US Congress claimed they were bamboozled and that the notice was probably illegal but “worried that saying so publicly could unravel several recent bank mergers….” Paley writes further that, “Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.” Indeed. Paley gets even more specific: “Until the financial meltdown, its opponents [of the notice changing Section 382 of the US tax code] thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.”

Being anything but a Master of the Universe, I’m having a hard time ciphering all of this. The US citizenry spent US$85 billion it didn’t have to purchase 80% of AIG. Then it spent another vaporous US$38 billion for, presumably, roughly another 40% or so of the company. Wait. Uh, 80% plus 40%, give or take, is 120%. And now we’re buying US$40 billion more of AIG stock with money we don’t have? Does that mean the US citizenry now owns roughly 160% of AIG. How can that be possible? From whom did we purchase the latest round of stock? And meanwhile, the Bush administration’s chosen banks have been handed a US$140 billion tax dodge.

Wait, wait. I think I get it. This is how the Masters of the Universe became Masters of the Universe, right?

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