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Joe Nocera offers a critical look at the reflexive move to a fourth bailout—this time $30 billion according to this morning’s reports, on top of the $150 billion provided in the earlier bailouts–for troubled insurance giant AIG.
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
Nocera takes a look at some of the abusive practices that are driving this amazing failure, but he misses an important aspect—the creative use of reinsurance transactions to make troubled subsidiaries look solvent. It’s hard to study this and not come away with a sinking feeling that we still don’t know the worst of it. And not to ask the obvious question: where were the regulators in the midst of this? That may be the still more pressing issue.
More from Scott Horton:
Mark Denbeaux on the NCIS cover-up of three “suicides” at Guantánamo Bay Detention Camp
From the June 2014 issue
No Comment — March 28, 2014, 12:32 pm
On CIA secrecy, torture, and war-making powers
Ratio of the top weekly fee paid a Munchkin in 1939′s The Wizard of Oz to the weekly fee paid for Toto:
Czech and German deer still do not cross the Iron Curtain.
The Japanese artist Rokudenashiko was arrested for distributing 3D-printer schematics of her vagina in exchange for donations intended for the construction of a kayak.
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“I hope that after reading the following pages the leaders of the Y. M. C. A. will start a campaign to induce good young men to do nothing. If so, I shall not have lived in vain.”