March 10, 2009
Dean Baker
Marketplace, March 9, 2009
Listen to commentary on original website
There’s been a lot of talk in Washington about a new era of openness and accountability, but when it comes to the bank bailouts, we’ll still in the bad old days.
We know the basic story. The banks got into trouble with complex financial derivatives that they apparently didn’t understand. Their losses left many bankrupt. And the taxpayers must either cough up the money or watch the financial system collapse.
Well, the taxpayers still have some options. Specifically, we have the right to demand that that money going out the door is actually used to prop up the banking system and not some well-connected hedge fund’s gambling habit. At this point, we just don’t know.
The secrecy problem is clearest with AIG, the giant insurer that has been largely taken over by the government. The government has already lent AIG $160 billion, and will almost certainly lend more in the future. Most of this money will not be repaid.
AIG needs taxpayer dollars because it made hundreds of billions of dollars of commitments in the form of “credit default swaps,” which are a type of bond insurance. AIG has to pay out on these credit default swaps because many of the bonds they insured, which include mortgage backed securities, are going bad at record rates.
The government has no legal obligation to honor AIG’s credit default swaps, but ostensibly it is choosing to do so because these swaps are held by financial institutions that could fail if the credit default swaps were not honored.
The problem is that the public has no idea if this claim is true because we don’t know who holds the swaps and how much they are owed. We don’t know if the Fed is only honoring AIG’s credit default swaps to ensure the solvency of banks and pension funds, or whether it may be paying off credit default swaps even in cases where hedge funds or other speculators were just making a bet that a bond would go bad.
The Fed and the Treasury are asking us to trust them with our money. But these are the people who completely missed the buildup of this financial bubble and minimized the problem at every turn. Their track record does not warrant much trust at this point.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.
