The trouble with socialism is socialism. The trouble with capitalism is capitalists. William F. Buckley invoked this adage in 2005 in a column lamenting runaway executive pay that had no relationship to actual company performance.
"Every ten years," Buckley wrote, "I quote the same adage from the late Austrian analyst Willi Schlamm, and I hope that ten years from now someone will remember to quote it in my memory."
Since the crash, we've seen unprecedented insider trading convictions, traders bragging about selling toxic mortgage investments to "widows and orphans,' and rampant examples of conflicts of interest where Wall Street firms bet against the very financial products that they were selling to their clients. But this bad behavior pales compared to the chutzpah happening now in a New York courtroom.
In Starr v. United States, the largest shareholder of the bailed-out insurance company, AIG, has sued the federal government for saving the company. Led by former AIG CEO, Hank Greenberg, and represented by super-lawyer David Boies, Starr claims the bailout was an unconstitutional taking because the terms of the deal given to the company were too onerous.
Everything about this case reeks.
September 2008 was the nadir of the financial crisis. On Sept. 7, the federal government bailed out Fannie Mae and Freddie Mac, two companies whose existence facilitated the real estate bubble through their purchase of toxic mortgages backed by the federal government's guarantee. On Sept. 12, the CEOs of major Wall Street firms met to consider how to save Lehman Brothers from impending collapse. Secretary of the Treasury Hank Paulsen informed them that the federal government would not offer a bailout to Lehman Brothers. On Sept. 15, Lehman Brothers filed for bankruptcy.
On Sept. 16, fearful of economic collapse, the Fed announced the bailout for AIG. The Fed agreed to pay up to $85 billion in taxpayer funds to make good on AIG's busted mortgage bets. In exchange, the Fed received 80 percent of AIG's stock. Later decisions increased the Fed's "investment" in AIG to $182 billion.
The taking was not forced. AIG was desperate to survive, particularly in the wake of Lehman's demise. Even a four-year old can understand that 20 percent of something is better than 100 percent of nothing. Faced with bankruptcy or bailout, AIG's Board voluntarily accepted the Fed's terms. As Norm Scheiber explained, "Arguing that the shareholders deserved even more is like a formerly starving man's insisting he deserved a filet mignon rather than a rib-eye." Now, they're suing.
For Hank Greenberg, the man who marched AIG to the brink of disaster and, with it, our entire financial system, being saved was not enough. Instead, Greenberg essentially argues that Wall Street firms have a constitutional right to bailout bargains. (As if the bailout wasn't enough, in 2009, just a year later, AIG paid executives $165 million in bonuses.)
While Greenberg's suit is absurd because AIG is the wealthiest welfare queen in history, it's also dangerous. Bailouts and government guarantees have already created a system on Wall Street that privatizes profits and socializes risk. A Greenberg win amplifies this moral hazard. Not only will Wall Street firms bet bigger and more recklessly, knowing a bailout is just around the corner, they'll also enjoy a constitutional right to favorable terms on the contract.
Still, ridiculous as Greenberg's argument is, the trial will also likely reveal lamentable behavior by officials at the New York Fed. Tim Geithner, Ben Bernanke, and Hank Paulsen have already been deposed and are all expected to be called as witnesses. Reports on the sealed depositions indicate that the Fed was clueless about AIG's toxic mortgage insurance contracts. Apparently neither Geithner, head of the New York Fed at the time, nor Bernanke, knew that Wall Street's biggest investment banks had so much riding on AIG.
This shouldn't be that surprising. Big government bureaucracy fails because it's so big. Its size exceeds the grasp of any single human being. The "fatal conceit" of big government is that government officials are capable of omniscience which allows them to "shape the world according to wish."
Far worse than ignorance, the trial may also reveal special treatment for the Wall Street firms whose insurance contracts with AIG were rescued. In previous bailouts, creditors were forced to accept less than face value of what they were owed. For example, in the auto bailout, bond-holding creditors of Chrysler were forced in 2009 to take 29 cents on the dollar as repayment for their loans. (Proof it pays to have friends in high places, the unions received 40 cents on the dollar.)
AIG's creditors, including Goldman Sachs, Merrill Lynch, and Bank of America received 100 cents on the dollar. Greenberg's lawsuit may reveal why. Would these Wall Street firms have failed if they didn't receive 100 cents on the dollar? Did they receive special treatment? Was the Fed just too overwhelmed to care about protecting taxpayer dollars?
Greenberg's lawsuit clearly reveals that Wall Street is no longer a bastion of capitalism and risk-taking. Washington's generosity has shattered that ideal. Just as welfare for the poor has caused unintended consequences of dependency and generational poverty, so too does welfare for the wealthy generate a sense of entitlement and reliance on the federal government as a backstop to save them from the negative results of their own poor decisions. This Wall Street dependency repulses Americans who live in the real world, and who neither expect nor would want the federal government to save them, and it threatens economic freedom in the long-term.
Greenberg's lawsuit exposes the contagion of Too Big to Fail. In this lawsuit, regardless of the nominal outcome, everyone is a loser. And the American taxpayer is the biggest loser of all.
Holding DHSS accountable for state Ebola plan
With reports of the first diagnosed case of Ebola in the United States this week from Texas and fears of another case in Hawaii, I requested information this week from the Department of Health and Senior Services regarding the state's plan for dealing with a potential Ebola diagnosis in Missouri.
In Texas, reports indicate that the person infected with Ebola presented at a hospital with symptoms and reports that he had been in Liberia, but was sent home. It wasn't until his nephew called the CDC that he started receiving appropriate care for the disease.
Public health experts are confident that the U.S. health care system can contain Ebola. But containment requires both a plan and execution. As concerns grow over the spread of disease, I believe it is vitally important for DHSS to active assure Missourians that their state government is prepared to move quickly in the event of an Ebola diagnosis in our state, and to work with health care providers on the front end to ensure that the mistakes in Texas are not repeated here.
State Rep. Jay Barnes, R-Jefferson City, represents the 60th District.