Everyone knows the old cliché that says, "you can't have your cake and eat it, too."
Well, in the current economic crisis, no "cake" is bigger than AIG. The financial "bakers" on Capitol Hill believed they could bail out AIG (have their cake) then control the way it does business (eat it too).
But their bailout scheme didn't avoid a disaster – it created one. If anything, the politicians are now choking on a cake of their own making.
In case you missed it, AIG's financial products division created the high-risk derivatives that exploded into the mushroom cloud of losses over the past year. Yet AIG employees in that very division just received some $165 million in contractually obligated bonuses. Meanwhile, since September 2008, AIG has paid $120 billion in claims to derivative counterparties around the world, some of which have already received government bailouts of their own.
Yet paying out claims and employee bonuses is no surprise for an insurance company – business as usual, right? Only if you overlook the fact that $173 b-b-billion in taxpayer money financed those payouts. And with every capital infusion, we hear new headlines of impropriety. It seems we have a case of déjà vu.
Recall this headline from October 2008: “After Bailout, AIG Execs Head to California Resort” on a $440,000 getaway that includes manicures and pedicures (ABC News).
Now it has happened again.
Outrageous? Yes.
Unexpected? No.
EWI analysts have long held the view that bailouts and government-controlling stakes in financial giants like AIG would fail. Government intervention is powerless to stop deflation, much less change investor psychology. As Bob Prechter has said before, it’s like pushing on a string.
After the first round of AIG bailouts, Prechter wrote this in his November 2008 Elliott Wave Theorist:
“‘AIG has continued to hemorrhage [money] despite the government’s involvement,’ or actually because of it, because the government’s ‘terms, including relatively high interest rates, proved too tight as the company experienced far greater losses than the government had anticipated.’ (Washington Post, 11/11) The only surprise to us is that anyone is surprised. The government’s response is to offer AIG a new loan of $152 billion, the biggest yet. And they thought black holes existed only in outer space.”
So, to argue against the bonuses, lavish trips and payouts is, well, to miss the point.
The U.S. government has created this beast. The powers that be have forcefully explained why the beast cannot be allowed to fail. American taxpayers have parted with some $173 billion to feed the AIG beast. And the government is now stirring up anger about the fact that less than 0.1% of that money has gone to bonuses?
This is not a dilemma for AIG. The company has a contractual (thus legal) obligation to pay the bonuses in question. Yet, the government faults AIG for upholding its legal obligations to employees. Couldn't the same logic apply to AIG's payment of much larger claims to its counterparties? Couldn’t the same logic apply to the government’s $173 billion payout to AIG as a whole?
Seems like a slight-of-hand trick has been played on the U.S. taxpayer, whose anger is being funneled toward greedy AIG execs instead of the government enablers who made it all possible.
This is beyond the scope of a “we’re watching every dollar” argument. The United States has printed piles of money for AIG on the assumption that it’s too big to fail. Yet by what measure is this disaster of a bailout a "success"?
The bottom line is, no matter how much bailout money the government throws at failing institutions in hopes of restoring investor confidence and consumer demand, the bearish trend will not change until investor psychology changes. Unfortunately for the U.S. government, psychology is a leading indicator, not a lagging one (as Keynesian economists assume). Negative psychology is forcing prices down, and government intervention is powerless to change the trend – a trend that is far from over.