AIG: Too Important to Fail

This post is more than 3 years old.

At some point, you've probably heard some version of the axiom that it's better to fail quickly and often, because then you learn a lot - about what not to do, and about what does work.  One thing I appreciate about working in the world of technology is that there are lots of opportunities to fail, and there's very little room culturally to keep failing in the same way multiple times.  You either learn your lesson and find ways to do it better the next time, or you're left behind.

I can't help but contrast this to today's news that AIG (American International Group), a for-profit corporation that is not doing well, will be given $30 billion in taxpayer dollars, after the $150 billion in taxpayer dollars they got last year apparently didn't do the trick.

U.S. taxpayers have involuntarily been made into long-term equity investors in a failing business venture.  I don't think we have any reason to be confident that "just a little more money" is going to do the trick this time.

Please excuse me while I go throw up.

AIG has been called "too important to fail."  I would like to see the full list of corporations and individuals who are Too Important to Fail, who are so above the natural benefits that come with experiencing failure in any system - software development, capitalism, or otherwise.  I would like to know that, if it's not TOTAL FAILURE TO SUCCEED AT WHAT THEY DO, and then TOTAL FAILURE TO BE BAILED OUT WITH $150 BILLION, what are the criteria and warning signs that might make us say, "hmm, I guess we shouldn't keep investing in that approach, let's learn from that failure and move on" - ?

I know what some responses might be.  "It's not that simple," or "this is an exceptional circumstance," or "you have no idea what you're talking about."  I will call B.S. on all of those responses, because the U.S. government is still spending my money to make it happen, and no matter what their reasoning is, they better do a heck of a lot better making sense of it for the American people.  Come on, I'm a smart guy, I've run a business with complicated finances, I can think about how complex systems work...explain it to me.  Make me understand why we should do the same failing thing over and over again and expect it to get better.  Give me one good reason to feel good about this.

Oh, there is that other axiom, isn't there?  The overly-quoted one from Mr. Einstein.  "Insanity is doing the same thing over and over again and expecting different results."

There are other things to be up-in-arms about, and there are many other injustices happening even within the government solutions to the economic crisis.  But today, I can't think of any other word for it: this is totally insane.

7 thoughts on “AIG: Too Important to Fail

  1. It's even worse though because we know what happens when the government props up insolvent banks--Japan did it in the 90s and they lost a full decade of GDP growth. But everyone says that this is the US and somehow its different here. If we prop up our zombie banks its going to somehow magically work but of course, our banks are too important to fail.

  2. Passing this on from a friend in Philly. There are alternatives, but the US doesn't always seem interested in learning from others.

    – news brief from George Lakey, Lang Visiting Professor 9/18/08

    OSLO, Sept 16 (Reuters) - Norway's economy has so far been sheltered from any direct impact of the U.S financial crisis and the government will not change the line of its 2009 draft budget because of the woes, Norway's finance minister said on Tuesday.

    How Norway handled its ‘90s bank crisis:

    [From 1991-93 the Nordic countries faced a financial crisis that brought the region’s economy to its knees.] Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.

    Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

    "We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.
    "The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

    [The cause of the crisis in Scandinavia had parallels with the US crisis, involving speculation on property.] The Nordic banks were nursed back to health and refloated or merged.

    [Norway’s nationalization of major banks that did wrong was intended to send a clear message to remaining managements to clean up their act.] In the U.S., the bail-out of Bear Stearns amounts to a huge subsidy for JP Morgan, according to Christopher Wood, chief strategist at brokers CLSA, and leads to “appalling moral hazard.”

  3. Amen, Chris! I don't understand economics or complex business stuff at all, but I know how I was trained: you don't have it, you don't spend it. I never read Small is Beautiful, but I'm thinking it's time to dust off the copy that's been sitting on our shelves for 30 years. And maybe pass it around!

  4. Oh I just love how you acknowledge that you know nearly nothing about the subject, but don't think it's any of your fault.

    I think you'd make fun of that trait in others, especially since it's most commonly found in Republicans.

    AIG insures the whole world's banks. It is intimately involved with nearly every financial system in the US.

    Have you seen "It's a Wonderful Life"? Then you know what a bank run looks like. Imagine that happening worldwide. That's a financial catastrophe. This only happens in finance, and maybe epidemiology--when was the last time you saw a run on a web developer?

    This is a short-term problem, with very long-term implications. What we've tried hasn't failed yet(except in the cases of Lehman Bros and Bear Stearns), and so far I've only become more convinced that we need to do whatever is necessary to get banking working again.

    Besides that, these bailouts are taking the form of loans or equity, not cash grants. Of course it still has value, and technically they were "given" the amounts you mention, but you're totally misrepresenting the situation by leaving out the fact that we got something back for that money.

    By "fail", they mean to become unable to be a dependable counterparty to their ongoing financial commitments. IE to go bankrupt. That's what they're too important to do. Obviously they should have never been allowed to become so important or to have so much exposure to these risks, but it's too late to fix that at this point.

    If you have no idea what you're talking about, it's best to go learn about it. It's not the government's job to explain every little action to every single taxpayer. In fact, reading the Bloomberg article you linked I'm having trouble figuring out what's so confusing!

    Have you forgotten Lehman Bros? This is serious stuff.

  5. Adam,

    Thanks for your comments. A few responses:

    I'm sorry you got this impression, but I never expressed anywhere that I know nearly nothing about the subject. In fact, I have spent a fair amount of time researching it and studying the way this and related parts of the financial system works. Despite my somewhat casual tone in the blog post, I take it seriously, and I tend not to rant about things that I haven't taken the time to try to understand. You'll have to trust me on that, I know, but I don't think you'd be commenting here if you didn't believe I was acting in good faith.

    I also never made any statements about it "not being my fault." I will take full responsibility for my role as a conforming taxpayer who has not done nearly all the things that could have been done to try to prevent us from getting us to this point. But I offer that in the same sense that an ant must take full responsibility for its role in the anthill not being shaped quite right.

    I know that technically, the U.S. government and its citizens received something in return for the money given to AIG. In my opinion, though, we received nothing of any intrinsic value, and so it's the functional equivalent of a cash grant. I'll be happy for the future to prove me otherwise, and I'll buy you a beer (or whatever other similar thing of intrinsic value you might want) if U.S. citizens are ever repaid those funds in cash.

    You agree that something was wrong with the system that allowed things to get to this point, but then say "it's too late to fix that." What words, what promises, what magical presentation allows you to have so much faith that the decision-makers and processes that got us this far are going to now get us out of it? If I make a bad choice related to driving and find myself careening off the edge of a cliff, the laws of physics don't allow for the possibility that it's "too late for me to crash and die" and that I must therefore be flown to safety. In the same sense, the principles of sustainable financial markets (if there is such a thing) don't allow for the notion that I can make some bad business choices, find myself facing bankruptcy, and be magically saved with resources that are totally external to my business.

    We may be able to defer failure and mitigate the effects of a collapse, but we cannot make the root causes go away by putting a band-aid on it, even a REALLY expensive band-aid.

    Finally, your comment that "it's not the government's job to explain every little action to every single taxpayer" is one I can agree with. In fact, I generally think it's the taxpayer's job to inform themselves and ask the government for more information when needed. But do you remember the sweet old days when the Bush administration had to go out of its way to justify the projection of spending $90 billion on invading Iraq? Do you remember the protests, the news conferences, the hand-wringing? We're talking hundreds of billions of dollars here, all being spent in a matter of days on entities and programs that a MAJORITY of the U.S. taxpayers don't understand. I don't think it's unreasonable to expect at least the pretense of getting into the details with taxpayers. But myself and many other people are asking, and the only real answer we're getting back is "trust us, we know what we're doing."

    Again, totally insane.

  6. By "you don't think it's your fault", I mean that you blamed your ignorance on others. Of course the financial mess isn't any one person's fault, except perhaps Bernie Madoff. Your ignorance, though, is in your own hands.

    It's not as though AIG is continuing the same business practices as in the past. The continuing losses are from past decisions. Most if not all banks had similar exposure to these risks.

    The fact is that in the near-term, nearly any business can in fact be saved from bankruptcy by a large cash infusion. Your car crash analogy does not apply.

    Really, if you want something to be mad about, the bailout of the Big Three automakers is much more similar to what you're talking about. That's a long-term open-ended commitment to AIG.

    The way I see it, it's like you're yelling at a fireman, "Hey! It's no use! They'll just burn it down again!" Of course that's not the point. The point is to save the perfectly valuable houses NEXT to the burning house, which would otherwise go up in flames. AIG is a house with a huge bomb in it, in a city full of wooden houses with thatched roofs.

    The continued existence of AIG in the short term cannot be replaced for any sum of money. If it goes down, we'll all be losing much much more than a few hundred billion. If today it's AIG, tomorrow it could be the US Treasury. How much do you suppose that will cost to fix?

    Finally, do you really think Obama would like to bail out the financial sector just for fun? He actually has an ambitious social agenda that costs serious money, and every dollar he spends on AIG cuts into the money available for the stuff he'd really like to do. But he and his advisers understand that this is a very dangerous situation, and the full commitment of the United States is required to restore normal market functioning.

    If your theory is that they're insane or dumb, what other pieces of evidence do you have for that? If AIG is the only piece of evidence, then it's a circular argument. If, on the other hand, you must admit that generally Obama seems to know what he's doing and to be a fairly sane dude, then you must rule out the insanity defense.

  7. Adam,

    I really appreciate you engaging me about this further.

    I guess I'd like to leave it at this: it's quite possible that within the model that the U.S. government and financial system has been using in recent history, the decision to give the money to AIG is at least consistent with past decisions, and maybe even the right thing to do.

    I realize that I shouldn't argue with one piece of it unless I want to argue with the way the whole system is structured. But sometimes I don't have time for that, and I still think it can be worth holding up these moments of, yes, insanity about the way the current system works as examples of why the whole system might need further examination.

    I hope that makes sense, but I also appreciate that you and I may be coming at this from two different worldviews, and that's okay too.


Leave a Reply

Your email address will not be published. Required fields are marked *