AIG les­son: Gov­ern­ment can­not run things

The Washington Times Weekly - - Commentary -

This whole AIG fi­asco — where the en­tire po­lit­i­cal class is sud­denly scream­ing over bonuses paid to de­riv­a­tive traders in AIG’s fi­nan­cial-prod­ucts divi­sion — is just a com­plete farce. What it re­ally shows is how the gov­ern­ment has com­pletely bun­gled the AIG takeover. Blame the Bush ad­min­is­tra­tion and the Obama ad­min­is­tra­tion. It also shows, once again, why the gov­ern­ment shouldn’t run any­thing, be­cause it can­not run any­thing.

AIG should have been placed in bank­ruptcy last fall un­der some sort of gov­ern­ment spon­sor­ship. While in bank­ruptcy, all the salary con­tracts (and ev­ery other AIG con­tract) would have been nul­li­fied and voided. At the same time, there would have been an or­derly liq­ui­da­tion and sale of AIG’s as­sets and sep­a­rate di­vi­sions.

But as things stand now, there still is no clear roadmap for the dis­so­lu­tion of AIG. There are ideas, but noth­ing is set in con­crete.

And as for the $165 mil­lion or so in AIG bonus pay­ments, the Obama ad­min­is­tra­tion — in­clud­ing the pres­i­dent, Trea­sury man Tim Gei­th­ner and eco­nomic ad­viser Larry Sum­mers — knew all about them many months ago. They were un­doubt­edly in­formed of this dur­ing the White House tran­si­tion.

So there’s no big sur­prise. No­body should be shocked. But Pres­i­dent Obama is do­ing his best play-act­ing ever. He knows full well that the na­tion­wide out­cry against fed­eral bailouts and takeovers is only go­ing to get worse on his watch. His poll num­bers are al­ready fall­ing, and this AIG episode is go­ing to pull them down more.

In­ci­den­tally, has any­body asked Team Obama why it is more than will­ing to break mort­gage con­tracts with a bank­ruptcy-judge cram-down, but won’t cram down com­pen­sa­tion agree­ments for AIG, de­spite the fact that the U.S. gov­ern­ment owns the com­pany? Kind of odd, don’t you think?

The Wall Street Jour­nal ed­i­tors get it right when they ask: Who’s in charge, and what’s the game plan? The whole AIG story is an out­rage.

What’s more, AIG is act­ing as a con­duit for tax­payer money that is be­ing sent to dozens of de­riv­a­tive coun­ter­par­ties, in­clud­ing for­eign banks and Amer­i­can banks like Gold­man Sachs. If we’re go­ing to bail out all th­ese other firms, why not bail them out in full tax­payer view? Why is the money be­ing laun­dered furtively through AIG? And where ex­actly is the end game for AIG? How are the tax­pay­ers go­ing to be re­paid?

And what is Trea­sury man Gei­th­ner’s role in all this? He ap­pears to be the big­gest bun­gler in what has be­come a mas­sive bungling. My CNBC friend and col­league Char­lie Gas­parino thinks Mr. Gei­th­ner can’t sur­vive this. I am in­clined to agree.

Nev­er­the­less, be­hind the furor over AIG, there is some good news to re­port on the bank­ing front. The de­ci­sion by the Fed­eral Ac­count­ing Stan­dards Board (FASB) to al­low cash-flow ac­count­ing rather than dis­tressed last-trade mark-to-mar­ket ac­count­ing will go a long way to­ward solv­ing the bank­ing and toxic-as­set prob­lem.

Many ex­perts be­lieve mort­gage-backed se­cu­ri­ties and other toxic as­sets are be­ing ser­viced in a timely cash-flow man­ner for at least 70 cents on the dol­lar. This is so im­por­tant. Un­der mark-to-mar­ket, many of th­ese as­sets were writ­ten down to 20 cents on the dol­lar, de­stroy­ing bank prof­its and cap­i­tal. But now banks can value th­ese as­sets in eco­nomic terms based on pos­i­tive cash flows, rather than in dis­tressed mar­kets that have vir­tu­ally no mean­ing.

Ac­tu­ally, when the FASB rules are adopted in the next few weeks, it will be in­ter­est­ing to see if a pro forma re-es­ti­mate of the last year re­veals that banks have been far more prof­itable and have much more cap­i­tal than this crazy mark-tomar­ket ac­count­ing would have us be­lieve.

Sharp-eyed bank­ing an­a­lyst Dick Bove has ar­gued that most bank losses have been non-cash — i.e., mark-to-mar­ket write-downs. Take those fic­ti­tious write-downs away, and you are left with a much health­ier bank­ing pic­ture. This is huge in terms of solv­ing the credit cri­sis.

Not one more dime of gov­ern­ment money is nec­es­sary for the banks. In­stead, the mar­riage of the cash-flow val­u­a­tion of bank as­sets and the up­ward­slop­ing Trea­sury yield curve will do the trick. Net in­ter­est mar­gins are ris­ing as banks pur­chase money for near-zero in­ter­est and loan it out at prof­itable rates. And the new markto-mar­ket re­form will al­low banks to hold their toxic as­sets for sev­eral more years and work them out — just as they did back in the 1990s.

We don’t need more TARP. We don’t need to take over more big banks. And we don’t need to have the gov­ern­ment run things it sim­ply isn’t ca­pa­ble of run­ning.

Lawrence Kud­low is a na­tion­ally syndicated colum­nist.

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