OPINION: Don’t want to ride shotgun in AIG’s Lamborghini

I knew that I couldn’t exactly pay the cop some money to make the problem go away. I couldn’t call a legislator to have him eliminate traffic laws. I was upset about the fine and the increase in my insurance premium, but I recognized that this is part of a necessary system. Eliminate the traffic laws and you get chaos and increased danger. You’re more likely to find yourself trapped in tangled metal. Traffic laws are part of a logical, civilized society.

I can’t help but think of traffic laws when I think of our current financial debacle. Wall Street wanted to speed. They didn’t want rules to slow them down on the way to major stacks of cash. Washington wanted Wall Street money, too. It’s a “your chocolate and my peanut butter” match. So Congress was glad to take the campaign contribution payoffs and relax enforcement barriers. The philosophy of “deregulation” is easy to espouse when the firms you’re helping help you back. There was money to be made on both sides. Forget long-term financial safety for the general public.

So we ended up with some really sexy cars that could fly down the road, exotic creatures like “credit default swaps.” Who knows what makes those default swaps go so fast — they are certainly confusing mechanisms — but man they pack some punch. AIG was a dominant driver of these bad boys. And they sure had a lead foot.

In reality, “credit default swaps” may not be as cool as a Lamborghini, but they certainly helped a lot of hedge fund managers actually sit in the driver’s seat of those super-expensive cars. According to The New York Times, credit default swaps are often defined as a “form of insurance because the seller guarantees payment to investors in case their investments go bust.”

O.K., so AIG was providing investment insurance policies through credit default swaps? Well, perhaps, but they weren’t setting aside enough money to back up the claims. So “insurance” is not the right word.

“They are not safe insurance in any familiar sense, however, because AIG was not required to set aside reserves in the event of a claim,” The Times wrote in a March 14 editorial. “That is why, when the bubble burst and defaults rose, AIG was unable to make good, provoking the bailouts.”

In plain English, the lack of regulation regarding credit default swaps meant that AIG could avoid the most basic rule of financial reliability — putting your money where your mouth is.

The New York Times also noted that Eric Dinallo, the insurance superintendent for New York State, estimates that “some 80 percent of the estimated $62 trillion in credit default swaps outstanding in 2008 were speculative.”

Um, $62 trillion? Our country’s annual Gross Domestic Product is around $15 trillion. The annual global GDP is $78 trillion.

I’m no math whiz, but 80 percent of 62 is just shy of 50.

OK, so are we looking at nearly $50 trillion in credit default swaps that are not backed by any collateral?

That’s not insurance; that’s reckless gambling on an epic scale.

But in 2000, Congress exempted credit default swaps from gaming laws. It’s like Congress decided to send the kids and the Visa with the scary uncle to Vegas.

The bailouts are wildly unpopular, but in my eyes, these decisions were made back in 2000, when Congress agreed to open the door for mega companies, such as AIG to gamble with trillions and trillions of dollars without backing those funds up with any real collateral.

The bailout money — which includes $170 billion to AIG — is a stack of sandbags to a flood. It’s a huge figure indeed, but still just a tiny fraction of what’s been put on the line by Washington’s reckless deregulation and the Wall Street money grab that followed.

Right now, we’re focused on the AIG bonuses, which are truly despicable, but those bonuses are just an exposed mole on a really ugly backside. This mutually beneficial money exchange between Washington and Wall Street is nothing new. It’s just that we’re paying more attention now.

I do believe things will eventually get better and that there will be some real positives to come out of today’s bad.
For instance, I believe we now see the need for basic rules of the game when it comes to financing. We certainly don’t want to sit shotgun anymore with the lead-footed AIG executive in the credit default swap Lamborghini.

In any sane society, that irresponsible fellow gets ticketed or jailed for riding wild through the streets, endangering society. We don’t expect government to encourage and facilitate reckless behavior, not on the roads, not in our markets.

No, in a sane world, we expect the speeder to pay a fine to the government — not vice versa.

Zach Mitcham is editor of The Madison County Journal.