Bailout needs transparency

Washington’s capitalism-good-or-bad religionists can’t seem to stop carping about bailouts and the threat of socialism and nationalizing banks. Yet they never say how they would address the staggering weight of toxic assets accumulated in the 2004-07 market casino bubble that their deregulated, anything-goes brand of rogue capitalism brought us, and that threatens to sink our economic ship. On those grounds, the phony debate they’re engineering for political face-saving about the crisis their hands-off free market created is as unconstructive as it is tiresome.

If they wanted to help, they could join serious critics of the serial bailout of the giant insurer AIG in pursuit of more transparency and a better deal for the government.

American International Group has clearly become the 800-pound gorilla of the too-big-too-fail category. The Treasury Department affirmed that yet again this week when it feverishly arranged AIG’s fourth bailout infusion, for another $30 billion, to avert a market panic when AIG had to report a $62 billion quarterly loss Monday. The latest Treasury aid, extended in exchange for more preferred stock, raised the federal government’s ante in the global company to $160 billion, making it by far the biggest recipient of bailout largesse.

Few experts, if any, would argue that AIG should be left to bankruptcy. Most argue that the complex conglomerate should be broken into several large units covering specific business areas — for example, its global property and casualty insurance divisions — that could be spun off and profitably sold. AIG has been trying to do that, but the down market and the burden of its toxic assets — the cratered hedge fund derivatives recklessly bought or insured by its holding company that have gotten AIG into trouble — raise potential investors’ fears.

One major irony of the current deal is that the government didn’t expand its ownership of the holding company to 100 percent (the government now owes 80 percent) precisely because so many pious critics loudly worry so much about the prospect of the government nationalizing banks and other financial institutions.

Another irony is that by not taking over AIG, the company’s troubled assets remain opaque, at least to the public. Both AIG and Treasury justify the expanded bailout — funds given as lines of credit, or for preferred shares, or to dispose of bad securities — as necessary to avoid domino-like failures of other companies whose viability hinges on AIG making good on its credit-default swaps, an unregulated form of insurance issued by AIG without commensurate reserves on those companies’ flawed derivatives. But neither AIG or Treasury will identify those companies.

If they were identified, Treasury or other regulatory authorities would come under pressure to force those companies and their executives to disgorge profits, or to contribute to the bailout fund through shares or cash. Certainly much of the bailout money now used to prop AIG is being distributed to the companies that depend on AIG for their own survival or profits.

Treasury and the Obama administration are correct to keep AIG afloat. The systemic risk its failure would pose just in its global insurance and reinsurance business is gargantuan. In the United States alone, AIG’s regulated and traditionally sound insurance division holds more than 375 million policies with a face value of $19 trillion, The New York Times reported. Compound that with its global insurance divisions and it’s obvious that the insurance industry’s health depends on government action to prevent a catastrophic domino-run on insurance companies.

But that’s no reason for Treasury and the Obama administration to obscure scrutiny of companies that should be scrutinized to ensure that bailout efforts ultimately expedite the restorative work that must be done to get weak companies, and the economy, back on track.