Financial Bailout

If congress had not played with the market using Fannie and Freddie to support policy the country would be better off today. The present situation in the credit market is a good example of what happens when efficient systems are left alone. Our highly efficient and extremely fluid capital market took advantage of the gamed system to speed the flow of money into sub-prime and low interest refinancing by highly motivated Wall Street players. The credit default market is not regulated per se and left to seek its own level developed into a $60 trillion asset base without even a single trading platform. Talk about efficiency. If the policy to replace jobs lost to foreign territories had not combined with the policy to throw money at America in the guise of affordable housing we would not be here today with a market melt down. New regulation will not prevent the inventiveness of an efficient market which will find the inevitable regulatory arbitrage to any solution congress will provide. Congress has a long history of putting reactionary band aids on the wounds it opens. This will leave gaps to be exploited and result in a another spiral to be fixed later.

The best policy is to leave the markets to do what they do best and keep artificial regulatory arbitrage opportunities to a minimum. This is painful but better than a series of crashes that will inevitably result from too much intervention. That is unless we do not want to be a free market any more and adopt some type of socialist system going forward.

AIG Party Time

AIG took top executives on a one week party parade to a luxury spa resort in California. Well not quit. This was a sales incentive trip for independent agents that sell insurance products for American General. Much in the same way that a salesmen who sells ten washing machines in a month may qualify for a manufacturers incentive trip, life insurance companies also incentivise their salesmen that sell insurance products. It takes a year to qualify so the event was planned and well promoted in advance of the recent public troubles. These were not employees except for the hosts but independent agents that have a number of products and companies to choose from when selling insurance. Each will receive a 1099 tax form from AIG for the value of the services and each will in turn need to report their part as income for tax purposes.

I think it was a poor (one of many) decision by the management of the company to continue with the plans for the event. These were however not employees but independent life agents. In the end they should have just canceled the event. It remains to be seen if AG could have sent the savings up as a dividend to the parent company where the toxic CDS's are housed since they are a separately regulated insurance entity. AG is now for sale so if they couldn't have sent to savings to the parent maybe the price (if sold) could have been reduced by $500k, although I think they are asking $18 billion.

Speaking of the bailout, the structure of the AIG "rescue", reminds me of the quote "with friends like these who needs enemies". According to the Treasury, the deal is a two-year loan, not a grant or a gift. It is costing AIG about $26.5 million per day (at the published current level of $61 billion, 12.5% on the borrowed funds and 8.5% on the un-borrowed amount). It should be noted that this money is being paid to the US government and if successful so will be the repayment of principal. If history plays out in a traditional fashion we the people will never see one red cent of the money. It will get stuck in wheels of the government and start leaking all over our congressmen. The earnings work out to about $200 per US household (110 million families earning $0.24 per day for two years at 12% interest). I know its not a lot but heck I'd take it if I were given a choice. Maybe Charlie Rangel (Dem Senator NY) could use his bit to let one of his three NYC rent controlled apartments go to a more needy family.

What should McCain do now?

McCain is a wacko and Obama is a fraud. What do they need to do now? Other than pull out because they are both above their pay grade there are a couple of things McCain can do at this point. McCain needs to shore up his very weak economic credentials. He needs to name his cabinet selections since neither he nor his neophyte VP have any creditability with the voters. He should also start talking about the supreme court not by name but he should start scaring the heck out of the population with the dire consequences of a BoIraq win. Maybe he could suggest that BoIraq would nominate a Muslim to the court so Hussein can round out the Christian domination.