(Update 1: Edited to clarify remarks on GE, GMAC) At least, Floyd Norris at the New York Times clearly would, taking some history into view:
The government Tuesday nationalized the American International Group, the financial giant that could not find anyone else willing to lend it the billions of dollars it needed to stay afloat. That is not the official version. Fed staffers, who briefed reporters at 9:15 Tuesday night, don’t even want us to say the government will control A.I.G. The government will name new management, and will have veto power over all important decisions. And it will have a warrant allowing it to take 79.9 percent of the stock whenever it wants. But they contend there is no control until the warrant is exercised. President Truman once tried to nationalize the steel industry, arguing that a strike that halted production in wartime created a national emergency. The Supreme Court ruled that was illegal. This time, however, the company agreed to the nationalization. It was the only way to get the cash it desperately needs.
Here’s the problem — and Calculated Risk has a good summary and take on this today as well: there simply is no way of knowing what the outcome of the government’s actions will be, although the track record of such behavior gives us a singular answer. That answer? Not a good one. Look at the mortgage lending market: if you aren’t originating for Fannie, Freddie, or Ginnie — read: the federal government — you aren’t originating, period. Which is surreal, to say the least. One of my deepest sources on Wall Street mused the other day about the Bush administration’s push for “the ownership society” a few years back, and noted that the backside of that effort should probably now be called “the ownership of society.” That an ostensibly GOP administration is overseeing this effort makes it that much more unbelievable to witness. With AIG the latest quarry to land in taxpayers’ lap — and make no mistake about it, that’s exactly what has taken place, even if we’re sheltered from losses — the question now becomes who else needs to be bought, or given access to Fed facilities, and what becomes of those companies. GMAC and General Electric come immediately to mind, given their sizeable financial operations, but there are others. Many others. I’ve seen some suggest that AIG needed the bailout, and that we’re on our way to recovery because the Fed has focused on maintaining liquidity. To a certain extent I agree with both sentiments: AIG probably would have been a bigger mess on its own had it been allowed to fail, and every failure brings us closer to recovery insofar as another company that took risks it shouldn’t have has hit the wall. But just because that’s so doesn’t mean that we’re on the right path. With Lehman, investors took heart in the signal — one that lasted all of two days — that said the Fed wasn’t going to intervene in free markets further. With AIG, the Fed’s balance sheet becomes fair game for any ailing institution looking to pile liquidity on top of insolvency. Worse yet, investors now have no road map to really know which institution is a candidate for government money and which aren’t. I heard a few fund managers speak about “a glimmer of hope” after Lehman. They’re singing a different tune today. And while the failure of AIG would certainly have been a mess, and bailing out the insurer saved us from that particular mess, it does little to restore any mechanism for balance to the broader financial markets: it’s the age old moral hazard issue at play, but now on a grand, unimaginable scale. Take undue risk, and get large enough in so doing before you get caught? Win taxpayer dollars secured by the loot you gained. (Everyone else? Thanks for playing, take your lumps, get some food stamps, and there’s the line. We’re looking at you, Lehman.) Every institution that topples gets us closer to the end, certainly; but that depends on what you define as the end. We have more than a thousand institutions that are set to fail over the next 12 months, depending on whose estimates you believe, and we have little choice but to run through the list to get there. But what sort of financial environment will exist when we do? One could make the argument that allowing AIG to fail and its counterparties to default would have been messy, painful, and perhaps even the sort of thing that destroys chunks of financial markets — but it might have also sped up the process of cleaning out a system in dire need of it. After all, AIG isn’t the only firm that made bad bets. As it is, we’re closer to an end, as most suggest. The only question now is what sort of end that really is.
