- Posted March 16, 2009 by
This iReport is part of an assignment:
A.I.G.: bankruptcy breaks the toxic contracts
The public outrage about A.I.G.s bonuses should be more focused towards the government rather than the company. It is only a matter of time until people loose all trust and patience with the government's erroneous actions.
A.I.G. has already taken steps to break off the speculative derivative business and to save the traditional portion of the company. The Obama administration should step in, put the toxic portion into receivership and clean out the traditional business. That approach would have been billions cheaper in the first place, and it would also break the existing contracts that led to bonus "obligations".
I feel a little embarrassed (because the pros act like amateurs), but on November 10, 2008 I wrote in "FED/A.I.G.: cheating the taxpayer" at http://www.ireport.com/docs/DOC-145255:
„The new structure of the bailout puts the taxpayer at risk to having to foot the bill for the sour bets on mortgage backed securities. This can potentially amount to hundreds of billions for A.I.G. alone. Since the financial crisis broke loose, I have advocated the breaking up of the companies in the financial industry in order to isolate the risks. However, the way the "deal" is structured is a potential disaster for the taxpayer, while it is fantastic for A.I.G.
A.I.G.s toxic assets are going to be placed into a separate company. The government purchases those through that company at 50 cents on the dollar. This not only cleans A.I.G.s balance sheets from those assets that they think are toxic but it also provides A.I.G. with a handsome book profit on the deal (read: BONUS)."
Yes, "read: BONUS" means nothing less than the $165 million in bonuses that are paid out now, and that's only what they can't disguise otherwise.
The list of financial companies that received bailout money from A.I.G. reads like a who-is-who of financial trickery:
Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion). Société Générale of France ($12 billion), Deutsche Bank of Germany ($12 billion), Barclays of Britain ($8.5 billion), and UBS of Switzerland ($5 billion). The list totals 80 companies.
Already in October, I called for breaking up the banks and let the derivative business be sorted out in separate companies in my article "while we celebrated, $700 billion already spent" at http://www.ireport.com/docs/DOC-98873 and in a number of follow up articles. You may be able to read into the above list of recipients that in an isolated approach, a lot of the various derivative bets would cancel each other out and the "casino problem" might shrink to manageable size. There is no government involvement needed.
In all its capital forms, bailouts, loans (with near-zero interest), and other benefits, America is approaching to sink a full year GDP on the financial system in a way that is utterly wasteful and unnecessary. It is the ultimate government waste that doubles America's debt within just a few months. More importantly, out of this massive amount of money will be ZERO stimulus effect for the economy and no effect for those that should not have received credit in the first place. I cheer for the latter as it is about time that America wakes up and starts living within its means again. However, that translates into a massive economic contraction of just about 27%.
Think of it. With a full year of GDP, America could have simply said "no income taxes for five years for everybody". That would have put an instant engine behind the economy right where it is needed most and the banks could have sorted it out amongst themselves. If markets continue to go down, and they WILL go down much more, the derivative market will collapse as a series of major players will not be able to meet their obligations, unless the taxpayer keeps on footing the bill. The only reason why it has not fallen apart so far is because worldwide government bailouts in the total amount of trillions of dollars keeps the $500 trillion derivative casino humming.
The bailouts will prove to be the ULTIMATE death knell for the economy. What our leaders don't seem to understand is that a country can't spend itself out of a crisis with more debt if it is already indebted to the brink. Chapter 11 bankruptcy protection is a viable way for companies to SURVIVE and also to save the billions of dollars of outstanding A.I.G. bonds owed to U.S. states.
Please comment. I will address questions, if I can.
H.R. Tschudi, economist and entrepreneur, Vancouver