Too Big To Fail

As the United States government extended its bailout of massive insurance company AIG to USD$150 billion, President Barrack Obama and many others are declaring the company "too big to fail". This company did not materialise from thin air into a 200 billion dollar behemoth, nor was it operating under the radar prior to the financial crisis. It was merrily making enormous profits guaranteeing debts which in the climate of a booming economy is like fishing with dynamite. Much back slapping ensued and the regulators had a busy time congratulating themselves on creating such fine economic times to allow this prosperity. Then, wouldn't you know it, cracks started to appear in the aquarium and the AIG suddenly was reminded that the insurance business involves the risk that you'll occasionally have to pay claims. Further - if you're insuring copious sums of highly obscure engineered financial products like the CDOs that became worthless when the housing bubble burst, there's a very good chance that you'll find yourself having to pay lots of claims at once! Now of course as a business you would plan for such occurrences and spread your risk and keep sufficient capital reserves to survive such a scenario - wouldn't you...

You probably would unless you were too big to fail. Then you might be forgiven for thinking that since the government is certain to bail you out if you find yourself with hundreds of billions in liabilities, you may as well enjoy the benefit of that taxpayer funded insurance policy and go on taking enormous risks to rake in the profits. It's a pretty sweet deal to be sure - keep all the profits and pay nothing for the guarantee you'll be protected if it ever does go bad. That's why you wont hear one word of complaint from me about the behavior of AIG. They behaved as any rational company would under the circumstances.

My complaint is with the policies of market self-regulation and minimalistic government that created this mess. The abject failure of the regulators to manage the growth of AIG and others like it into giants too big to fail has ironically expanded the governmental realm far beyond where even the left-leaning major parties would have it. The US government now officially owns 80% of AIG courtesy of these loans and cash injections. It has been nationalised. The fact of the matter is it actually owns the losses of the entire company as it has made it perfectly clear that if the company needs further help it will be forced to step in. It just doesn't own all the potential profits, only 80%. Worse, it has owned the entire company ever since it allowed it to become so large it's failure would catastrophically destabilise the financial markets - it just didn't collect any of the profits back in those prime days either. Now the taxpayers are finally entitled 80% of their rightful profits but they find themselves proud owners of a steaming financial heap still hemorrhaging money courtesy of the financial collapse brought on by the risk-taking behavior the regulators implicitly sponsored.

Think on that some, dear voters. Next time you hear someone touting the evils of government interference, the infallibility of financial markets self-regulation and other such talk I hope you will consider the consequences carefully. You are paying a premium for your car or home insurance and you rightly don't expect it for free. Learn from our mistakes and don't allow this situation to arise again where the tables turn and you are the one writing insurance policies.