The events of the last 24 hours regarding AIG remind me of an old saying from Churchill. I am paraphrasing but it is something like this–there is nothing like the sound of an angry bullet whizzing by your head to focus the mind. Well, we sure have had the angry bullet whiz by. The Feds are taking over a private company. Yes, it may be large but it is a private company nonetheless. It is no different than the car wash owner down the street from you. If it got in financial trouble what is the rationale to take it over? If size alone determines when the Government is going to seize a company, then I ask exactly what size matters. Is it gross sales, total assets, net worth, cash flow, price per share if it is a public company? More importantly is the question about exactly who is it that will be making this determination. Do you want matters like this to be made by politicians on an ad hoc basis? Or God forbid some new Government system of overseeing “vital” industries. Stalin decided they were all vital.
In my opinion the free market is logical and fair if the Government rules don’t change in the middle of the game; and it is very efficient and expidetious. Yes, it can be punishing to those who make stupid mistakes or bend the law. It should work that way. I have already written about how it is only the creditors of AIG that are at risk and those involved in funding insane mortgage insurance schemes, not the ordinary policy holders of the insurance subsidiaries of AIG. I have read that the Government might even make a profit on the deal and that is fine but why couldn’t private parties have made that deal. Do you want the Feds involved in your insurance dispute with an AIG sub? Worse still is some bureaucrat making the decisions about whether you get a policy in the first place. People have to be responsible for the consequences of their own actions. The same is true for companies. No one was forced to loan to AIG or do business with it. They were making good money for a long time and now times get tough and they want someone else to clean up their mess and leave them whole. Yes, I know the shareholders are being diluted substantially, but the fact is if the company is broke they should be wiped out. The game of musical chairs has stopped. The greater fool theory is proved valid once again. What about the investor who bought AIG stock in 2003 and sold in early 2007 and made a kiling. Is someone going to try and take back his profit? And all those lenders who made loans in the same time frame and profitted handsomely in the bargain. I don’t begrudge either one their profit but don’t feel sorry for those at the end of the line holding bad paper. The Government should not be in the banking, insurance, steel, auto or any other industry. If you work for a large tech firm today would you want to wake up tomorrow and find you worked for the Government? Any company with big debt is subject now to takeover with this precedent that has been set.
Many are calling for new regulation. Exactly and precisely what is it they propose? What regulation are they going to put in place? It is hassle enough to go to the bank to get a car loan now. Would you like it if you not only had to satisfy the banker you were credit worthy but then also have your loan approved by a bureaucrat in a faraway place. Of course the politicians would just say they were protecting you from yourself. How nice of them. We already have bank regulators out the wazoo, both Federal and State; there is the SEC and FINRA for the security firms; every State has insurance regulators in place. All our major industries are highly regulated as it is. The Justice Department also enforces the Sherman Anti-Trust laws. You do remember the Microsoft litigation of just a few years ago on that very issue. People are creative and will always come up with new ways to own things, sell things and make loans and take collateral. I much prefer the market place regulate those matters than the Government. Our common law already has in place plenty of protections for those that have been cheated or defrauded. The market works, with both rewards and punishments. Every Government in the civilized world has bankruptcy laws, even the Chinese, because of this principle of risk/reward.
We need to protect and nurture all our industries from winemakers to steel makers and carpenters. We need new businesses. Don’t tear down the formation of captital and “rich” people. We need them. Their mony spurs growth for all of us. Put it this way, have you ever been hired by someone poorer than you? Didn’t think so.