If the federal government must persist in its seemingly bottomless bailout of insurance giant AIG, it should at least identify who benefits courtesy of taxpayers.
The Obama administration on Monday promised $30 billion more to rescue AIG from collapse - the fourth such bailout for the firm since August. Last year alone, the Bush administration gave AIG $150 billion in loans and cash infusions to prop up the company.
This time, Treasury and Federal Reserve officials have abandoned the charade of promising taxpayers that no further bailouts of AIG will be necessary. It's possible, they say, that the insurer will need more help to stay afloat. By one estimate, AIG could receive nearly a quarter-trillion dollars by the time this infuriating lesson is learned.
Yet the government has provided few specifics about who ultimately benefits from all that money. AIG and the Fed won't identify which other major financial institutions have received billions in collateral in this arrangement.
They should. Taxpayers deserve a clearer picture of where their money is going, and which other firms were tied so heavily to the reckless investment schemes that have helped to throw the economy into a tailspin. It might be possible for some of them to share in the insurer's losses. Some of these "counterparties" must have known the extraordinary risks involved with squeezing maximum profits out of an unregulated financial shell game based on shaky mortgages.
In essence, the government's argument for these serial bailouts of AIG is that nearly everybody benefits, because the consequences of a collapse of global financial networks would be devastating.
AIG insures municipalities, Fortune 500 companies, small businesses, and other entities that, combined, employ more than 100 million Americans. The insurer sets the standard for the "too-big-to-fail" argument. If AIG collapsed, it would likely take with it pension funds and many banks in the United States and Europe.
So taxpayers are left with a choice that is really no choice at all: Reward a company for its extreme recklessness, or risk a financial failure that would affect millions.
The government's effort at restoring the financial industry still has a piecemeal quality to it that continues to sap investor confidence. The Dow Jones Industrial Average fell slightly yesterday after a precipitous 300-point drop Monday to a 12-year low.
Whether greater regulation would have prevented this crisis isn't certain, but AIG was allowed to take these risks in the absence of regulation. Because the "credit-default swaps" it sold as a form of insurance were not regulated, AIG wasn't required to set aside money in reserve to cover potential losses from the mortgage-backed securities.
The investment strategy was based on the belief that housing prices would only go up. When housing prices fell, there was nothing to cover the losses.
Nothing, it turns out, except taxpayers' wallets.