Proofiness - Charles Seife [34]
When the risk finally caught up with the securities and the whole risk-mismanagement scheme collapsed, these individuals tended to hold on to their wealth. Some of them even managed to make lots of cash even after the meltdown, thanks to another incarnation of moral hazard.
AIG, a massive insurance company, was at the heart of the meltdown, with tens of billions of dollars in bad mortgage risk. By the time the economic crisis came about, AIG had swollen to gigantic proportions. It had a trillion dollars in assets, and a finger in almost every big financial institution in the nation. If it collapsed, it would send tremors through all the banks and the investment firms in the United States; it might even cause some of them to collapse as well. People would panic, and potentially our entire economic infrastructure could be shaken to rubble in a matter of days. Economists call this potential systemic risk, and it was the ace in AIG’s hand—by using that risk, AIG could ensure that the government would keep shoveling money into its coffers.
Because the government couldn’t let AIG collapse for fear of destroying the economy, company officials realized that they had carte blanche to go wild and take whatever risks they wanted. AIG officials were largely insulated from the consequences of their actions, because they suspected that their company wouldn’t be allowed to fail no matter what risks they took. This gave AIG’s managers the green light for risk mismanagement on an enormous scale. They could deceive their investors about the risks that they were taking, misuse their assets, siphon off money through bonuses, and gamble on risky investments in hopes of reaping a windfall. If things turned sour, the government would have to step in and bail them out. Congress had no choice but to subsidize AIG’s risk-taking.
Things did, of course, turn sour with AIG’s risky investments, and the government duly stepped in. On September 16, 2008, the feds bailed it out with an $85 billion loan. “Nothing made me more frustrated, more angry than having to intervene, particularly in a couple of cases where taking wild bets had forced these companies close to bankruptcy,” Federal Reserve chairman Ben Bernanke admitted in mid-2009. But because of the fear of triggering an economic disaster, “I had to hold my nose and stop those firms from failing.”
Unfortunately, the bailout didn’t stop the misbehavior. After all, AIG was still too big to fail—so long as the government was afraid of systemic risk, AIG officials had no reason to act honorably and try to put the company on a sound financial footing. Within days of the bailout, AIG executives were spending nearly half a million dollars of the bailout money on a retreat to a posh resort in California, where they indulged themselves with spa treatments, lavish banquets, and of course, plenty of golf—$7,000 in greens fees. Lawmakers were livid. But that anger wasn’t enough to stop them from giving the company an additional $38 billion in October and then another $40 billion in November. Edward Liddy, the CEO of AIG, promised to behave. “We are tightening our belt,” he told a reporter in October. “Just as the American consumer, the American taxpayer is tightening their belt, we are doing the same thing. But we’re not stopping at one notch; we’re going three and four and five notches.” Apparently, AIG belts are constructed somewhat differently, because within a few months, Liddy was explaining to Congress why he felt it necessary to use the bailout money to pay AIG employees $160 million in “retention” bonuses. The top bonus was a whopping $6.4 million. Seventy-three