Thursday, August 13, 2009
Baton Rouge, Louisiana
WHY CAN’T I GET A LOUISIANA BAILOUT?
At first, it was the big financial guys who were “too big to fail” that were getting all that bailout money. Billions to banks, insurance companies, and then to auto makers. If you are old enough to remember back to the depression, the popular song of the suffering epitomized what was taking place:
“Once I built a railroad, I made it run, made it race against time.
Once I built a railroad, now it’s done. Brother, can you spare a dime?”
Well you can sure tell that inflation kicked in. Instead of financial panhandlers asking passersby for a dime, they head to Washington and ask for a spare $50 billion or so.
At the front of the line is A.I.G., Louisiana’s biggest insurance boondoggle that this column wrote about last week. It is hands down the biggest single financial disaster in Louisiana history of a company with such a huge Louisiana presence. This is a company that recently posted the largest quarterly loss in American Corporate history-some $61.7 billion. To put this sum in perspective, A.I.G. was losing more than $27 million every hour. That’s $465,000 every minute.
Now one would assume that there are regulatory mechanisms in place to protect the weary and leery average citizen. And in fact, the supposed white knights are the various state insurance commissioners who took great umbrage of the accusations made in last week’s column of how perilous the financial condition of A.I. G. happens to be. “Misinformation is being circulated” with “inappropriate assertions based on incomplete information that ultimately hurt both policyholders and taxpayers,” the National Association of Insurance Commissioners’ press release lamented. The release went on to say that “A.I.G. companies are financially sound and fully able to pay claims.”
And how can you argue with that conclusion? Well, except for the fact that the NAIC conveniently failed to mention that you and I as taxpayers have bankrolled this shaky insurance conglomerate to the tune of more than $210 billion. And like the man once said, a 100 billion here, a 100 billion there, and pretty soon you’re talkin’ about some real dough.
Here’s what’s been happening. Insurance regulators have for years allowed A.I.G to privatize the gains but socialize the losses. The fat cats at A.I.G. get million dollar bonuses year after year, but when the losses must be paid, it’s the taxpayer, you and me, that have to cover all the wild-eyed spending spree that regulators allowed to take place.
The tipping point of much of A.I.G.’s problems was an insurance product devised by A.I.G.’s London office called a credit-default swap. A CDS, in its simplest form is just a bet on an outcome. It’s a way of insuring a variety of investments including mortgages. There is nothing wrong with selling such insurance as long as there are reserves in place to pay up in case major losses occurred. But that was the clinker. A.I.G. kept virtually nothing back to pay the piper. And any way you cut it, CDSs were insurance that should have been closely regulated by insurance regulators.
Could insurance commissioners regulate the business done by A.I.G. in London and other countries? Of course. Not only they could, but it was imperative that they should have tightly overseen the A.I.G. activities abroad. This is particularly true where Louisiana is involved. As has been pointed out before, A.I.G. is the single biggest insurance company operating in Louisiana. But when policyholders pay their yearly premiums, the money does not necessarily stay in Louisiana. It flows through a variety of A.I.G. subsidiaries worldwide. And there is nothing wrong with such a revolving flow of dollars as long as proper regulation is taking place.
In the early 1990s, Louisiana was the key state to lead a major audit of Lloyds of London, then the largest operating insurance group in the world. Their financial condition was weak, and state regulators insisted on strict financial reserves to protect Louisiana and other state policyholders. No such case with A.I.G. Even though the CDSs were insurance policies, there was virtually no regulation by any governmental entity at either the federal or state level.
A.I.G. sold over $500 billion worth of CDS insurance in only seven years, with more than $64 billion of that tied to the subprime mortgage market. Yet the company didn’t even have a fraction of that amount on hand to cover the losses that eventually took place. They operated in a vacuum with no one looking over their shoulder. Recently, Treasury Secretary Timothy Geithner took a shot at insurance regulators when he called A.I.G. “a huge, complex global insurance company attached to a very complicated hedge fund that was allowed to build up without any adult supervision.”
All this complicated financial gibberish has become a smokescreen by both insurance companies and regulators to make this financial mess too complex for the average Joe to understand. And for good reason. Literacy is power. Remember that it used to be a crime in the Deep South to teach slaves to read.
In an excellent summery of the insurance regulatory bungling that appeared recently in Rolling Stone Magazine, Matt Taibbi concludes with good reason that in the age of CDSs, most of us are financial illiterates. “By making an already too – complex economy even more complex, a historic revolutionary change has taken place in our political system – transforming democracy into a two-tiered state, one with plugged-in financial bureaucrats above and the clueless customers below.”
So after all is said and done, A.I.G. execs keep their lavish bonuses, continue to run up huge losses, keep squealing for bailouts of your tax money, and for all practical purposes, continue to operate with little or no regulation. I guess we need some updated lyrics to the old song:
“Once I sold insurance, it was such fun – sold credit default swaps by the million.
Once I sold insurance, now it’s done. Brother, can you spare a billion?”
“I sincerely believe… that financial establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” –Thomas Jefferson
Peace and Justice
Jim Brown’s weekly column appears in numerous newspapers and websites throughout the south. To read past columns going back to 2002, go to www.jimbrownla.com.