What Went Wrong with AIG?

The following was originally posted by John Carney on The Business Insider. This analogy explains in simple to understand language what happened to AIG to make it such a drain on taxpayer money. Enjoy.

Still confused about how AIG lost its shirt by going into the securities lending business big time? We understand. It's terribly complex and full of words that make your eyes glaze over.

So we decided to break it down into the simplest terms Wall Street transactions can be explained: the two cows story.

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

Questioning Politics

Wasting Money

We learned in a Congressional Oversight Panel report, released Friday, that the initial $250 Billion in disbursements from the bailout was a smashing success for the banks. The report states that the initial disbursements amounted to overpayments to these companies in the amount of $78 billion. That's all equity (probably non-taxable) on the banks' books. They must be thrilled!!!

Financially ailing insurance giant American International Group, which the Treasury Department deemed to be too big to be allowed to fail, received $40 billion from the Treasury for assets valued at $14.8 billion, the oversight panel found.

This makes me want to establish my own bank and immediately begin requesting funds from the government. Do you think they'd fall for that one?

One of the following happened:

1) The government overpaid on purpose as a way of propping up the balance sheets of the banks. In other words, this was a massive government handout that the treasury knew would never be paid back, despite their insistence to the contrary;

or

2) The government didn't know that they were paying too much. I don't know if this is the scarier scenario or not. I do think this is the most likely case, as evidenced by this quote:

In December, in response to questions from the oversight panel, the department wrote that the value of preferred stock purchased by the government was "at or near par," meaning Treasury paid $1 for every $1 dollar of asset.
"The way the Treasury secretary described it does not fit with the numbers that were produced in our much more extensive valuation analysis," panel chairwoman Elizabeth Warren told reporters Friday. "The secretary of the Treasury described it in December that these were par transaction and that is not supported by the numbers."

The fact of the matter is, whether you agree with the stimulus or not, how can you trust the government to handle financial transactions of this magnitude based on their track record? Leaving aside the persistent threat of corruption, most politicians just don't have the education or experience to deal with financial matters of this sort.

Meanwhile, the Government continues to act just like a little kid, always pushing their limits to see how much they can get away with before we, the people, get angry enough to do something. Unfortunately, we apparently haven't gotten angry enough in a long long time.

This is just another reason why I am 100% opposed to any new stimulus plan being proposed.

Who's in Charge?

I like this article a lot. This is a very appropriate way to begin my blog.

545 PEOPLE

By Charlie Reese

Politicians are the only people in the world who create problems and then campaign against them.

Have you ever wondered why, if both the Democrats and the Republicans are against deficits, WHY do we have deficits?

Have you ever wondered why, if all the politicians are against inflation and high taxes, WHY do we have inflation and high taxes?

You and I don't propose a federal budget. The president does.

You and I don't have the Constitutional authority to vote on appropriations. The House of Representatives does.

You and I don't write the tax code, Congress does.

You and I don't set fiscal policy, Congress does.

You and I don't control monetary policy, the Federal Reserve Bank does.

One hundred senators, 435 congressmen, one president, and nine Supreme Court justices 545 human beings out of the 300 million are directly, legally, morally, and individually responsible for the domestic problems that plague this country.

I excluded the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered, but private, central bank.

I excluded all the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman, or a president to do one cotton-picking thing. I don't care if they offer a politician $1 million dollars in cash. The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator's responsibility to determine how he votes.

Those 545 human beings spend much of their energy convincing you that what they did is not their fault. They cooperate in this common con regardless of party.

What separates a politician from a normal human being is an excessive amount of gall. No normal human being would have the gall of a Speaker, who stood up and criticized the President for creating deficits. The president can only propose a budget. He cannot force the Congress to accept it.

The Constitution, which is the supreme law of the land, gives sole responsibility to the House of Representatives for originating and approving appropriations and taxes. Who is the speaker of the House? She is the leader of the majority party. She and fellow House members, not the president, can approve any budget they want. If the president vetoes it, they can pass it over his veto if they agree to.

It seems inconceivable to me that a nation of 300 million cannot replace 545 people who stand convicted -- by present facts -- of incompetence and irresponsibility. I can't think of a single domestic problem that is not traceable directly to those 545 people. When you fully grasp the plain truth that 545 people exercise the power of the federal government, then it must follow that what exists is what they want to exist.

If the tax code is unfair, it's because they want it unfair.

If the budget is in the red, it's because they want it in the red.

If the Army & Marines are in IRAQ, it's because they want them in IRAQ .

If they do not receive social security but are on an elite retirement plan not available to the people, it's because they want it that way.

They vote their own pay raises for themselves because they want it that way.

There are no unsolvable government problems.

Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power. Above all, do not let them con you into the belief that there exists disembodied mystical forces like 'the economy,' 'inflation,' or 'politics' that prevent them from doing what they take an oath to do.

Those 545 people, and they alone, are responsible.

They, and they alone, have the power.

They, and they alone, should be held accountable by the people who are their bosses provided the voters have the gumption to manage their own employees.

We should vote all of them out of office and clean up their mess!

Charlie Reese is a former columnist of the Sentinel Newspaper.