The World According to Oatney

Feds Take Over AIG, Embrace Socialist Economy

The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.)

The final decision to help AIG came Tuesday as the federal government concluded it would be "catastrophic" to allow the insurer to fail, according to a person familiar with the matter.

The Feds obviously believe that AIG's demise would precipitate a larger economic collapse because AIG is one of the largest insurers in the world. That supposition is probably true-AIG going under would lead to an immediate and almost certain catastrophe in the economy. However, the federal government has been more than a bit selective in deciding what companies it will bail and what companies shall be allowed to destroy themselves. (Oh, and Democrats should not decieve themselves into thinking that a Democratic administration would not have done the same thing.)

I realize that I am going to sound like Mr. Mean here, but I don't believe the federal government should be bailing out any of these companies, even though so many Americans are invested in them in some fashion-especially a firm like AIG. To do so encourages both companies and people to engage in the same irresponsible fiscal behavior that got our country into the present economic crisis, because it sends the message that if the company you invest in is large enough, the government will certainly bail them out of trouble.

That is not a free market economy, and it is the wrong recipe for economic recovery.

Labels: Economy, Elections, Presidential Election

posted by Deacon David Oatney @ 12:33 PM