that began in the Bush Administration and is commonly referred to as the "bank bailout," continues under the oversight of the Obama Administration.
This Great Credit Bailout begs many questions. A few of these questions and their possible answers are addressed in this diary, below the fold.
As the Great Credit Bailout continues, the following interrogatories seem material:
Was A.I.G. the vehicle used to transport the "Great Credit Bailout" funds to their ultimate destinations?
What were the ultimate destinations for the taxpayer funds delivered by A.I.G.?
Why were these recipients of A.I.G. "bailout" funds allowed to receive these funds without taking the proverbial "haircut"?
Was A.I.G. the designated "fall guy" for the machinations of other Wall Street players?
To begin our look at the answers to the above questions, we should first examine what Federal Reserve Bank Chairman, Ben Bernanke, said in a speech that he gave on Friday, 2009 April 3. His speech was on the Fed’s balance sheet and was given at a symposium held in Charlotte, NC – home town for Bank of America. (Boldfaced emphases added)
A second set of programs [‘Direct Lending to Borrowers and Investors’] initiated by the Federal Reserve--including the Commercial Paper Funding Facility (CPFF) and the Term Asset-Backed Securities Loan Facility (TALF)--aims to improve the functioning of key credit markets by lending directly to market participants, including ultimate borrowers and major investors. The lending associated with these facilities is currently about $255 billion, corresponding to roughly one-eighth of the assets on the Fed's balance sheet. The sizes of these programs, notably the TALF, are expected to grow in the months ahead.
...the CPFF and the TALF are rather unconventional programs for a central bank to undertake. I see them as justified by the extraordinary circumstances in which we find ourselves and by the need for central bank lending practices to reflect the evolution of financial markets; after all, a few decades ago securitization markets barely existed.
The third major category of assets on the Fed's balance sheet is holdings of high-quality securities, notably Treasury securities, agency debt, and agency-backed MBS. These holdings currently total about $780 billion, or about three-eighths of Federal Reserve assets. ______________
The Fed's holdings of high-quality securities are set to grow considerably as the FOMC, in an attempt to improve conditions in private credit markets, has announced large-scale open-market purchases of these securities.
On the questions of A.I.G. being a conduit to other creditors, and the ultimate destination of taxpayer fundes, Tyler Cowen (Professor of Economics at George Mason University) writing in the New York Times, "Why Creditors Should Suffer, Too" offers the following:
In truth, it’s not the shareholders [this group now includes the U.S. taxpayer] of the American International Group who benefited most from its bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of A.I.G.’s derivatives deals — firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Société Générale, Barclays and UBS.
And concerning the questions of why and A.I.G. as the "fall guy," Cowen says:
RIGHT now, people cannot understand why A.I.G. received bailout money, so they feel deceived. A single insurance company, even a very large one, just does not seem that essential to the American economy, which makes the company all the more a scapegoat. Much went awry at A.I.G., but in the context of a bailout, the company should be thought of as the conduit for helping an entire market that went bust.
This poses a very difficult public relations problem for the government, because the Federal Reserve and the Treasury do not want to discuss the importance of the creditors too publicly right now.
Why not? It would be bad precedent, and mind-bogglingly expensive, to promise to pick up all future obligations to major creditors. At the same time, any remarks that threaten to leave creditors hanging could panic the markets. So silence reigns, the Fed and Mr. Geithner receive bad publicity over the bailouts, and we are all laying the groundwork for a future financial crisis.
After spending trillions of dollars on the Great Credit Bailout, one additional question is: "What do we expect to get for all those taxpayer dollars?"
By repeating the same economic actions, it appears that we will get more of what Joseph E. Stiglitz calls "Ersatz Capitalism" and what James K. Galbraith describes as the "Predator State" – less regulation of financial institutions; more financial engineering a la credit-default swaps; increased corporatism; and the thwarting of such public goods as health care, a greener environment, Social Security, et cetera.