Government Welfare for Banks

Tyler Cowan of the NYT makes an important point that the bailout of AIG has gone almost exclusively to the big banks, bailing them out from their poor and risky decisions.

But there is a big hole in these proposals, as there has already been in the government’s approach to bailing out failing financial companies. Even as they focus on firms deemed too big to fail, the new proposals immunize the creditors and counterparties of such firms by protecting them from their own lending and trading mistakes.

This pattern has been evident for months, with the government aiding creditors and counterparties every step of the way. Yet this has not been explained openly to the American public.

In truth, it’s not the shareholders of the American International Group who benefited most from its bailout; they were mostly wiped out. The great beneficiaries have been the creditors and counterparties at the other end of A.I.G.’s derivatives deals — firms like Goldman Sachs, Merrill Lynch, Deutsche Bank, Société Générale, Barclays and UBS.

These firms engaged in deals that A.I.G. could not make good on. The bailout, and the regulatory regime outlined by Timothy F. Geithner, the Treasury secretary, would give firms like these every incentive to make similar deals down the road.

I don't believe it. Why do I as a taxpayer have to give Goldman Sachs and Merrill Lynch money that they have lost fair and square because of their foolish and ignorant behavior? Let them go bankrupt, just as any of us would if we had done the same thing individually or in our local bank or company. Someone must prove to me that Goldman Sachs going bankrupt would destroy the world or our country. I don't believe it. I think it might destroy the bankers and the wealthy, and that's what's really going on here. That is what is intolerable (to them), and they're doing everything they can to avoid it.