Following the 2008 financial meltdown, congress used a little common sense and passed legislation known as Dodd-Frank, that limited banks and insurance companies from engaging in risking investments backed up by the taxpayer. “Go ahead and gamble on high-risk investments if you want, but don’t expect a bailout,” so the logical reasoning went.
High-risk derivatives were one of the major financial culprits that led to the financial reforms. Insurance companies like A.I.G. were insuring risky Wall Street investments, knowing full well that if things went bad, old Uncle Sam would be there to pay for the damage done. And since insurance companies like A.I.G. are regulated at the state level, regulators in Washington paid little attention.
Here’s what happened that caused the financial crisis. Insurance regulators had for years allowed A.I.G and other insurance companies to privatize the gains but socialize the losses. The fat cats at A.I.G. got multi-million dollar bonuses year after year, but when the losses had to be paid, it was the taxpayer, you and me, that were called on to cover all the wild-eyed spending spree that regulators allowed to take place.
The tipping point of much of A.I.G.’s problems was an insurance product called a credit-default swap. A CDS, in its simplest form, is just a bet on an outcome. It’s a way of insuring a variety of investments including mortgages. There is nothing wrong with selling such insurance as long as there are reserves in place to pay up in case major losses occur. But that was the clinker. A.I.G. kept virtually nothing back to pay the piper. And any way you cut it, CDSs were insurance that should have been closely regulated by insurance regulators.
A.I.G. sold over $500 billion worth of CDS insurance in only seven years, with more than $64 billion of that tied to the subprime mortgage market. Yet the company didn’t even have a fraction of that amount on hand to cover the losses that eventually took place. They operated in a vacuum with no one looking over their shoulder. Then Treasury Secretary Timothy Geithner took a shot at insurance regulators when he called A.I.G. “A huge, complex global insurance company attached to a very complicated hedge fund that was allowed to build up without any adult supervision.”
So after all was said and done, A.I.G. execs keep their lavish bonuses, continued to run up huge losses, kept squealing for bailouts of your tax money, and for all practical purposes, continued to operate with little or no regulation.
Dodd-Frank was passed in 2010 to put an end to all these shenanigans. But the campaign contributions from the financial industry rolled in during last fall’s congressional elections. And low and hold, just last month, congress dramatically weakened Dodd-Frank to allow Wall Street to once again play their financial games with government-guaranteed funds.
Sad to say the Louisiana congressional delegation joined in the efforts to allow risky financial behavior. Senate opponents Mary Landrieu and Bill Cassidy were in lock step in voting for huge financial loopholes that puts taxpayers on the hook for Wall Street gamblers. The only responsible voice in the whole debate from the Bayou State was Louisiana Senator David Vitter, who actually led the charge in opposing any weakening of financial oversight, and who deserves kudos for his efforts.
So although America has had enough of Wall Street and insurance welfare, taxpayers are the losers again. And it also looks like we could be hearing the 1930s song, “Brother can you spare a dime.” But with different words this time.
“Once I worked on Wall Street, it was such fun-sold risky investments by the million.
Once I worked on Wall Street, now it’s done. Brother, can you spare a billion?”
“I sincerely believe… that financial establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” –Thomas Jefferson
Peace and Justice
Jim Brown’s syndicated column appears each week in numerous newspapers throughout the nation and on websites worldwide. You can read all his past columns and see continuing updates at http://www.jimbrownusa.com. You can also hear Jim’s nationally syndicated radio show each Sunday morning from 9 am till 11:00 am, central time, on the Genesis Radio Network, with a live stream at http://www.jimbrownusa.com.