Outcry Over AIG Bail-Out: What’s the Solution?

by Andrew Pollack / April 2009

In recent months, the bourgeoisie has been petrified by the renewed acceptability in public discourse of the ideas of nationalization and socialism. Granted, their media have twisted the meaning of the former into public aid to private banks, and the latter into any form of government ownership or control. But the very use of those terms comes in the context of a systemic crisis in which their more radical meaning is being increasingly discussed by workers.

In March a new term was on the lips of every media pundit: the pitchfork. This symbol of populist outrage was wielded metaphorically on every channel to describe popular ire over the $135 million in bonuses granted to AIG executives. No pitchforks were actually wielded, and no concrete actions were taken to protest the bonuses (aside from one bus tour to AIG executives’ homes).

But the symbolic wielding of these implements shows that the ruling class knows that after the word comes the deed, and that workers comfortable talking about nationalization and socialism will at some point go looking for modern-day implements of struggle.

A few days after news of the bonuses broke and popular outrage mushroomed, mainstream commentators began to point out that the bonus amounts were dwarfed by the $183 billion in taxpayer money that had gone to the company itself. But they did so not to demand the cancellation of this gargantuan gift, but as part of a campaign to try to convince taxpayers that both the bonuses and the far-bigger bailout were unavoidable.

But this campaign encountered a hitch when it was revealed that much of this $183 billion was going to banks that had purchased "insurance" from AIG, which, as a New York Times editorial pointed out, was in fact more gambling than insurance. The banks had bought unregulated credit default swaps from AIG, in essence gambling on the rise and fall of their investments. AIG was not required to set aside reserves in the event of a claim, and the swaps did not represent any financial interest in the firm or portfolio being bet on.

The insurance superintendent for New York state has said that some 80% of the estimated $62 trillion in credit default swaps outstanding throughout the economy in 2008 were speculative—meaning taxpayers may yet be asked to pony up amounts far greater than even the AIG bailout.

What’s more, even though none of the swaps had yet gone bad, AIG had already funneled huge chunks of the series of federal bailouts to its bank counterparties, and would reveal neither the names of the banks nor how much they had gotten, despite repeated Congressional and media queries.

And these banks had in fact hedged their bets by setting up subsidiaries, which would cover their bets with AIG in the opposite direction. So AIG’s payments to the banks were the equivalent of paying out on a fire insurance policy before a fire even occurs.

The New York Times business columnist Gretchen Morgenson reported that Rep. Carolyn Maloney of New York had twice asked for a full accounting of the counterparty deals from Fed head Ben Bernanke, but was told that was "proprietary information." Responded Maloney: "But we are the proprietors now. Taxpayers own the store, and we should be able to see the books."

Prolonged outrage finally forced AIG to detail where the federal money had gone. Not surprisingly, one of the biggest recipients was Goldman Sachs, to the tune of $13 billion. Goldman had employed both Henry Paulson, George Bush’s treasury secretary and architect of the first AIG bailouts, as well as Edward Liddy, AIG’s current CEO, installed by the government when it took over the company.

Others included Merrill Lynch ($7 billion), Bank of America ($5 billion), Citigroup ($23 billion), and Wachovia ($1.5 billion).

Counterpunch columnist Michael Hudson exposed the self-serving nature of the feigned outrage over the bonuses by Sen. Charles Schumer and Rep. Barney Frank, "the two leading shills for bank giveaways over the past year," and noted how this outrage allowed them to deflect attention from the bigger AIG bailout.

Hudson noted that AIG "owed much more to other players—abroad as well as on Wall Street—than the assets it had. That is what drove it to insolvency." In other words, AIG’s "insurance" had no more reality than the Ponzi schemes of convicted felon Bernie Madoff (or for that matter the scheme at the center of Mel Brooks’ "The Producers").

Many commentators, even in the mainstream media, noted the hypocrisy of saying that neither the bonuses nor the bank counterparty agreements could be violated because of the sanctity of contracts—yet autoworkers at the very same time are being asked to tear up their contracts. Nor did the government demand that the tens of billions that the banks got from AIG be lent out to credit-starved consumers or businesses, any more than it had with previous gifts of hundreds of billions.

But Morgenson’s colleague at The New York Times, Andrew Sorkin, urged taxpayers to put down their pitchforks: "The fundamental value in question here is the sanctity of contracts. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts."

This was exactly the tune played by the banks during March as they told Obama that if he didn’t stop threatening their compensation or pandering to populist rhetoric, they would cease to collaborate in crafting his next bailout plan—a tune which Obama was perfectly happy dancing to.

Said Sorkin: "The president suggested that we just tear up those bonus contracts. He told Treasury Secretary Timothy Geithner to use every legal means to recoup taxpayers’ money." But Obama dropped that line within the week once it was clear that commentators like Sorkin were successfully deflecting the outrage. And soon thereafter, legislators dropped efforts to pursue in the Senate a bill matching one approved by the House reclaiming 90% of the bonuses.

Sorkin also trotted out the most common justification for the bonuses: "AIG built this bomb, and it may be the only outfit that really knows how to defuse it. AIG employees concocted complex derivatives that wormed their way through the global financial system. ... We may actually be better off if they can figure out how to unwind these tricky investments."

But in fact the bets on bets on bets that these derivatives represent must simply be wiped off the books—as is the case with the entire category of toxic assets that Obama’s latest banking bailout plan is supposed to address.