Once again, I am writing to you because, while I support most of President Obama’s policies, I am very concerned about the administration’s handling of the crisis in the financial markets. I have followed these developments fairly closely, and so far the Geithner/Summers approach appears indistinguishable from the Paulson approach. If the Democrats in Congress fail to put the brakes on the current round of sweetheart bailout deals, the Republicans will very likely take back Congress in 2010.
Although the President and his appointees have primary responsibility for these matters, the Congress cannot abdicate its responsibilities. Unfortunately, Mr. Frank, Mr. Kerry and others have chosen to focus on taking cheap shots at a solvent and well-run bank like Northern Trust, instead of focusing on the wholesale shoveling of taxpayer cash into clearly insolvent entities like Citibank, Bank of America and AIG. These sweetheart deals add up to literally hundreds of times the amounts given to Northern Trust, and give an unfortunate meaning to the President’s promise to focus on "shovel ready projects."
The latest reports on AIG are particularly disturbing. Under the euphemism of "credit default swaps" or "CDS," companies like AIG have been allowed to write phony, unregulated insurance policies without any meaningful underwriting and without maintaining meaningful reserves. There is absolutely no reason why the federal government should be honoring AIG’s obligations on unregulated "insurance" for wealthy speculators.
If I buy ordinary insurance from a legitimate, regulated insurance company and the company becomes insolvent, my remedies are severely limited and the federal government normally will not step in to make me whole on any claims I may have. The sophisticated investors who bought AIG's swaps knew they were unregulated and knew they were not backed by meaningful reserves. Nevertheless, the current administration apparently intends to "backstop" AIG’s swaps.
The original TARP legislation should never have been passed given the complete lack of oversight and accountability. That is water under the bridge. However, this administration needs to understand that if it blows the remaining TARP money guaranteeing speculative instruments like AIG’s credit default swaps, no more TARP-like money will be made available under any circumstances.
The President’s request for more TARP money in the new budget is a clear opportunity to address this issue. There should be no more bailouts for any financial company outside of some legitimate and well-controlled form of receivership. If the Democrats in Congress fail to deliver this message loud and clear, they will deserve whatever happens to them in 2010.
Note: Given the limited response to my previous diary, I am not taking the time to add links. If anyone has questions I will stop by and take a look this evening.