"Ready for dinner"
If financial derivatives, as Warren Buffet so famously declared, are “weapons of mass destruction,” then the insurance company AIG is what ground zero looks like after an ammunition depot full of credit default swaps has detonated.
Much “outrage” — to borrow a term employed recently by both Larry Summers and Ben Bernanke — has been vented at the $450 million in bonuses contractually owed to the AIG employees who sold the CD swaps that blew up the company and threatened to bring down the global economic system. And rightly so — it is infuriating that these jokers are taking home millions while unemployment rates surge across the globe and millions are kicked out of their homes. But even a number as large as $450 million shrivels against the $120 billion of government money that AIG paid out to various counterparties to make good on its various obligations. As has been noted before, AIG made its business insuring against the possibility of a global economic collapse, but did not have the wherewithal to pay up when that collapse actually happened.
But once we get past the rage and the anger, isn’t there a more important thing to be worrying about than revenge? How about the question of how to rejigger the system so that this doesn’t happen again? Locking up all of AIG’s credit swaps salesmen and throwing away the key would provide a great deal of moral satisfaction, but probably accomplish little of systemic worth.
On that note, we can turn to today’s Wall Street Journal article by Damien Palleta, “U.S. to Toughen Finance Rules,” which begins:
The Obama administration, moving with increasing speed, has inked the main contours of its plan to revamp financial-market oversight — changes that will ripple through the economy, affecting everything from the operations of international banks to consumer protection.
I am a little bemused by the “increasing speed” description. I know there are some critics who would like the Obama administration to have already fixed the banking system and restarted economic growth. Myself, I’ve had a bit of a hard time keeping up with the economic stimulus package, housing plan, most-ambitious-budget-in-my-lifetime, and a raft of other initiatives. But whatever: There’s never been a better time than the present to come up with a serious framework for regulating the financial system, and it’s good to learn that the administration is moving forward.
One prong of the plan is some kind of a “consumer financial products” watchdog that would presumably limit the ability of mortgage lenders and credit card companies to lure consumers to their financial room with “innovative” new products. A “central body” to watch over derivatives trading is also supposedly part of Treasury Secretary Geithner’s agenda.
It’s going to be very interesting to see how such strategies are implemented. If there’s one thing that Wall Street is very, very good at, it’s coming up with new ways to game the system after the old ways have either been outlawed or proved ruinously self-destructive. The SEC could not even prevent crime as bold or bald-faced as the fraud committed by Bernie Madoff or Allen Stanford. How will government stay ahead of, or just keep even with, the constant stream of invention that the highly paid bright minds at the AIGs of the future concoct?
Because they’ll be at it again, once the smoke clears from ground zero.