San Diego Housing Bubble News and Analysis

You think we'll ever get our money back from GM too?

It would have been a lot cheaper to build a new car company from the ground up. Pay assemblers $20/hr wage + $7/hr in benefits rather than the current uaw $60/hr in wages and benefits.

$50,000,000,000 to subsidize 100,000 uaw workers = $500,000 each.

Don't be silly. The role of government is to take your money and give it to someone who made campaign donations. It is not to give you something back.

Harsh but true.

The only way the system doesn't work is if you open your eyes.

So where we end up finally with all these bailouts, free distributions trying to fix impossible complex crash/bubble to fix..... already China & Russia raised concerns against strength of dollar.

You've got to put it into context.

We (.gov) didn't give AIG 180 Billion. We gave Goldman Sachs, JPM, Citi, other banks and sovereign funds nearly 180 Billion using AIG as a conduit paying out their CDS. That adds no value to AIG but sure made all of the banks involved have record Q1 profits!

I honestly don't know.

If the 'reserve currency' is not the US dollar, I think it will start a war

It will make the US unable to fund operations. The reserve currency status is like a tax to the empire via the recycling of petro-dollars.

We'd have to shut most of the HUGE government down including the military and all it's bases.

It would not be a pretty process.

Conversely, keeping the financial order the same imposes a possible single point of failure for the whole world economy. WIth a quickly deflation economy and skyrocketing deficit becomes more likely every day.

The world is in a sticky position.

And all of them should've lost the money for making bad investment. But of course they are too big to fail.

This is true. But... would you also have been in favor of canceling - or, more accurately, discounting - all of AIG's insurance contracts where claims were due? My point is that if you don't make Goldman, etc. whole - which is fine - then you can't make Jane Q. Public whole on her husband's (who just died) life insurance either. Everyone is made whole or everyone gets the same haircut. You gotta pick one.

Dave,

I don't think the choice is as black and white as you make it. When the FDIC takes over a bank, they do not make the investors whole, nor do they cover accounts bigger than the insurance limits. Likewise in the this case, the government could pick and chose who they make whole, and who they give haircuts to.

Now, politically that might be difficult for a group of people put in office through campaign contributions. Or you could argue that it was not the government's place to pick and choose. (Although by choosing to make everyone whole they are choosing winners (banks that got bailed out) and losers (taxpayers who will foot the bill) Or you could argue that you don't think giving some haircuts but not others is fair. (Sorry, but fairness in our economy went away a long time ago) But there is no reason the government couldn't have given haircuts to some and not to others.

For instance, they could have set limits on how much they were going to make people whole for. (Just like the FDIC does) They could have said, we will honor insurance policies up to 5 million dollars, for instance. That would have protected Jane Q. Public whose husband just died, but not traders at GS.

Likewise, they could have decided to backstop certain products but not others. The government could have backstopped life insurance products, business coverage, homeowners, etc, but not backstopped derivatives and/or credit default swaps.

Or another option would have been to only backstop credit default swaps where the holder of the swap actually owned the underlying asset. ie, those that bought the swaps as insurance vs those that bought the swaps as gambles.

But the reality is that what the fed/government did is not apply any of these kinds of tests but instead made everyone whole at the taxpayer's expense. Most of us see that as rather unfair, because we believe that companies like GS knew darn well what they were doing, knew darn well that AIG couldn't cover all these bets, and knew darn well that their former associates were in place to cover their bets.

XBoxBoy

The bailout is not actually $180B.
http://www.propublica.org/ion/bailout/it...

All gov investment is senior to common stock, so the $1B market cap assumes value of AIG after the government has been paid back.

Now, who the suckers are who believe that AIG common is worth anything, that is a completely different story. But it is not like US gov turned $180B into portion of $1B.

I'm not so sure the top execs should get bonuses equal to a quarter of their market cap...

http://www.washingtonpost.com/wp-srv/bus...
AIG in Talks With U.S. Over Another $250 Million in Bonuses

GM assemblers get $14/Hour, plus 7 in bennies and OT when it's there.

All the rest is legacy costs to the guys on retirement.

GM was only $60 Billion. Quit complaining.

John

You're right that the govt. has done a lot of picking of winners and losers - so to speak - between industries and within the capital structures of certain companies. No doubt. What they have NOT done, however, is pick winners and losers among customers within the product categories of particular financial companies. So, you're comparing apples and oranges with your analogies in this case.

To use one of your examples, recall that FDIC insurance limits were known well before the banking crisis started. No one went to AIG's customers and said, "Oh, and by the way, if this company should fail, the regulators will decide which customers get made whole and which don't." And while the insurance limits were later expanded, depositors who were supposed to be made whole in the first place didn't suffer because of this. So these changes didn't negatively impact anyone who wasn't already SOL.

That's not to say that the govt. couldn't have done what you suggest after the fact in AIG's case. They can do whatever they want - apparently. But, thus far at least, the govt. has tried to treat all classes of CUSTOMERS (as opposed to investors) within these various financial companies equally. Rightly or wrongly.

Don't mix Jane Q. and GS.
GS did not purchase insurance from AIG.

GS purchased Credit Default Swaps as insurance policies for their MBS that went bad. GS got paid out by the taxpayer as did other banks and sovereign funds and that is money we will not be getting back as they are insurance plan payouts that only go one way. It is not our responsibility as taxpayers to be paying out on securities insurance plans. It is our responsibility to protect depositors for their hard earned cash they place with financial institutions that are supposed to be regulated and closely observed for capital requirements by .gov.

The problem I have with this is that GS claimed they hedged their losses on bad MBS meaning they got paid twice, once from the hedge and once more from the taxpayer. It's all wrong and so are giving bonuses to people running an insolvent company that they drove to insolvency.

So, let me get this straight. It is "not our responsibility as taxpayers to be paying out on securities insurance plans," but it IS our responsibility to pay out on individual and corporate insurance plans that are not securities related? So, the government should pick and choose which AIG customers get paid out on their insurance claims? I just want to make sure I'm understanding what you're suggesting.

Sure they did. CDS are nothing more than insurance policies by another name. That's why most folks are up in arms that they have existed outside the insurance regulatory framework for so long.

I don't see how you got that from my post. I said it is the government's responsibility to cover depositors. That would be cash depositors of banks and not customers of companies like AIG unless I missed something and they became a bank holding company like GS.

If the government would have never bailed out AIG we would be much further through the imminent depression and deflationary credit collapse by now. The major pain has not been taken yet and when .gov can no longer prop up the system we will see much worse than we've seen so far in this declining economy.

OK, I have no problem with this. But, just to be clear, you think it's ok if virtually all of AIG's claims are voided, or heavily discounted?

So, for example, some guy with $500K of life insurance through AIG dies. GS and the other banksters get nothing. But this guy's family gets nothing as well. In other words, all AIG claimants are treated equally - and get nothing (or next to nothing) as the company's insolvent and doesn't have sufficient capital to pay out claims.

Just making sure I'm understanding you.

Exactly. It's not the business of the government to be paying out private insurance except possibly in the case of natural disasters.

I just recently bought a sizable term life policy from a company that has been around for a long time and is very well capitalized. If they somehow go down then I need to find a new insurance company. There's no reason outside of Soc. Security that my family should be getting paid out because I bought insurance from a defunct company.

OK, your position in consistent. I can't disagree on a micro level. On a macro level, I would have preferred some level of AIG "bailout" where ALL claimants took (big) haircuts. Just not big enough to bring down the entire system. But what's done is done.

You might feel differently if you were the beneficiary of an AIG policy and discovered you were getting zippo. It's one thing to have your insurance company blow up when it doesn't owe you anything. You just move to another insurer. It's quite another to have it blow up with an outstanding claim. As I like to say, where you stand on an issue generally depends on where you sit.

Excuse my ignorance. But isn't life insurance, car insurance, home owners insurance well regulated. Are the issuers required to have a decent percent of capital to back up the policies they write?

And weren't CDS's unregulated, and there weren't requirements for capitalization?

I think that is the key difference.

It's like comparing a State Farm Car Insurance policy (picked an insurance brand randomly) to paying some street thug $5 to make sure your car isn't vandalized when you have to park in a bad neighborhood. The first you purchase with a confidence that it's well regulated and backed with assets. The other you know has inherant risk. When you purchase the latter type of "insurance" you know the kid you're paying off may or may not stick around and watch your car.

They're supposed to be regulated but then so are the banks and they got into all of the trouble they did. Honestly though you have to recognize what the insurance business model is. In the case of inadequate capital be it a natural disaster that takes out to many covered assets to pay out or the insurance company plays with investments they shouldn't and takes losses, they can't pay out on all of the claims covered at once. They likely can only pay a small fraction. How much faith do you put in your insurer with that in mind?

If they are allowed to write too many policies in excess of the ability to pay a very reasonable amount of them then they should not be in business. Somehow aside and beyond that banks wrote "fog a mirror" loans and got themselves into death spiral trouble. You can't let the depositors take the damage or everyone will lose confidence in the currency and the gov't ability to back that currency. Seeing the gov't not use it's ability to back insurance policies has nowhere near the detrimental effect.

Yes, but the problem is that those brilliant folks we put in Washington allowed companies to play in both markets. So, AIG would have been fine, except for the division that wrote tons of CDS policies which took out the whole shebang.

I know that some (many?) will disagree with me here, but the government should have made distinctions, and they should only have stood behind those policies which they regulated, and had some responsibility for. This would have meant significantly more turmoil in the big banks as AIG defaulted on all those CDS, but honestly I believe that bankruptcy is a solution, not a problem. (Just like foreclosure is a solution and just like the FDIC taking over an insolvent bank is a solution) But the powers that be, or maybe better described as the powers that are beholden to the banksters didn't see it that way and moved all those losses on the CDS's to the taxpayer.

Well said, XBoxBoy.

There should have been a firewall in place between their standard insurance business and CDS business.

BTW, the banks/financial firms did not only buy CDSs on securities they held; they bought default swaps -- in large volumes -- simply to speculate on the demise of the housing/credit markets. It's a bit like taking out multiple life insurance policies on a neighbor who has late stage lung cancer -- unbeknownst to the insurance company -- and having the taxpayers cover your claims.

Not sure if this is exactly what the taxpayers were paying out, but it's highly likely.