The truth about AIG's payments to "foreigners," and Glenn Beck is a moron

Conservatives are up in arms about AIG paying tens of billions to foreign banks. Conservatives are wont to do that when they think wealth is leaving the country. Glenn Beck blathered, in a perfect impersonation of protectionist Pat Buchanan:

GLENN: $58 billion has gone to foreign banks. Now, why isn't America outraged by that? Because America doesn't know that fact. America isn't talking about that fact. If we would have let AIG fail, then these other banks would have had to come to us and said, hey, what are you going to do on these. And we would have then had to have the discussion, do we send money over to France, do we send money over to Germany, do we send money over to England? And that we couldn't have won. The people in Washington, they would have never gotten that past you.

STU: We're not that into stimulating.

GLENN: We're not that into stimulating. We're not into shifting wealth from our continent to other continents.

STU: That's where we draw the line.

GLENN: That's where we draw the line.

STU: Of all the stuff we do, that's where we draw the line.

Beck is nothing more than a 21st century mercantilist, who thinks that keeping "wealth" within one's country is the way to prosperity. He doesn't understand that international trade, from goods to financing, allows everyone to prosper. He doesn't even understand that when he talks about "wealth," he's confusing it with "money."

As I explained first here, AIG paying foreign banks was not money laundering. Does Beck even know what money laundering is? He obviously doesn't understand what AIG was doing.

Like any insurer, AIG writes lots of policies. But AIG's unprecedented woes are because, unlike most insurers, it sold a lot of policies, specifically credit default swaps, that it couldn't cover. Its people knew they couldn't cover them, actually: they figured that while the economy was good, and bank revenues and tax receipts stayed high, AIG could collect nice premiums and not have to pay out relatively much. But despite their stupidity, the fact remains that AIG had to meet its contractual obligations to everyone, regardless of nationality. No money was being "hidden" at any time, so there was no money laundering done.

It's immoral to make the U.S. taxpayer pay for AIG's massive losses, but I'm putting that aside here to talk strictly about the nature of AIG's debts. AIG just happened to owe more to foreign banks than it did to American ones, that's all. If the bailout had been accomplished privately, AIG still would have had to pay foreign firms. Can you imagine if AIG had paid American creditors first, and foreign firms with whatever was left (if anything)? Any firm who does this will find its reputation quickly shot to hell, and it would soon cease doing business internationally. Foreign firms and governments would start retaliating by pulling business from the United States, exacerbating things for everybody.

Were it UBS that owed tens of billions to non-Swiss banks in a similar situation, would Beck be so adamant about defending it if it said it wouldn't pay American creditors?

I didn't think so.

Outrage over AIG: the same old hypocrisy, lies and corruption

Let it never be said that I didn't warn about this from the start. I rhetorically asked last November, "what bank would lend you money to repay debts that you owe others, when you likely can't repay that latest loan, and then the bank will loan you an additional 79.4% of the initial amount so you can sell...assets...to repay the entire loan?" In February, AIG said it won't sell any assets to repay the federal government, because it couldn't find any buyers. After announcing a $61.7 billion loss in 4th quarter 2008 (the most for any company ever), AIG simply relied on the federal government to give it another $20 billion "infusion."

And it has now given $165 million in bonuses to top executives, the first part of $450 million that it says it has to pay out. AIG claims these were "promised," "contractually obligated" and "retention bonuses," despite the fact that 11 of the recipients don't even work for AIG anymore.

Now every limelight-seeker in the federal government, from Obama to every freshman Congressman, is blue in the face from screaming about this, throwing out words like "irresponsible," "waste" and "taxpayer money." Chief among the critics is Chris Dodd, who received $103,100 in campaign bonuses from AIG during the 2008 election cycle, and snuck in an amendment into the stimulus bill that -- surprise, surprise! -- protects the AIG bonuses.

Congress is looking to institute a special tax on AIG bonuses to recover the money. CBS radio had a soundbite of Chuck "The Schmuck" Schumer saying it would be 100%. The point has already been brought up that such a tax is a bill of attainder, hence unconstitutional. But since when did that stop the federal government from doing anything else unconstitutional? Obama's former law professor has suggested how that can be done via loopholes, and this asshat Michigan Congressman proposing a "surcharge" tax that applies only to companies that are at least 79% owned by the federal government. Of course, AIG is the only such company. That's how the so-called "Amazon tax" survives here in New York state, though its exemptions clearly shows that it was aimed at Amazon.

Pure hypocrisy from the feds should never surprise us. Not to downplay that giving AIG anything is a waste of taxpayer money, but let's put things in perspective. The federal government will blow through $165 million in not even 30 minutes, $450 million in 1.3 hours, and the $170 billion guaranteed to AIG in just under three weeks. And that's going by the "mere" $3 trillion in federal spending for the 2008 fiscal year (not including what's spent on the Iraq and Afghanistan wars, which are about $200 billion more!). But why should government ever care about spending and proper record keeping when it's not its money? A "shadow holding company" was set up for AIG's toxic assets so that AIG doesn't have to list those assets on its official books. In the private sector, this is called accounting fraud.

It also turns out that for all their accusations, Obama and Co., particularly Tim Geithner, have known about the bonuses for several months but only now are trying to stop it. Let's not be the least bit shocked, though. It's more than just hypocrisy. Just as this entire crisis has been engineered by the government so it can take over major industries, it's another subtle power grab for the feds. No doubt one of the "critics" will himself say that they can't pass a bill of attainder, so this is a sneaky step on the road to a tax on bonuses regardless of company. Mark my words.

Claire McCaskill threatened, "We state the obvious in the letter, bonuses should not be given for failure." If memory serves, she's the same who said executives of companies receiving TARP funds should be compensated no more than the President, i.e. $400,000 per year, including bonus. I don't know if she's too stupid to see the simple, easy solution, or if she's so agenda-driven that she ignores it out of ideological convenience. How about, you know, not putting Americans on the hook for AIG's idiotic business decisions? Then AIG can pay whatever it wants, and drive itself into the ground for all we care. If it goes Chapter 7 or 11 with no ability to meet these bonus "obligations," then its executives can stand in front of a bankruptcy judge and explain precisely why they deserve the compensation when the company failed.

If "we the taxpayers" hadn't been forced to hand over our money, then we all wouldn't have been thrown into the same leaking lifeboat. We could have all exercised individual decisions in trusting AIG, reaping the rewards, missed opportunities or bad consequences of what was solely our choice.

Had AIG gone bankrupt, it certainly would have affected lots of other companies, but sometimes part of a forest must burn down so it can grow back fuller and with more life than before. But that isn't even an appropriate analogy: when a company goes under, its assets and infrastructure don't just disappear. The Bear Stearns and Lehman Brothers buildings and all their employees didn't just vanish from the planet; they were reabsorbed into the economy. So AIG would have been liquidated, with all its holdings and buildings distributed among creditors, who could then make use of "what's left" as they see fit.

The importance of allowing firms to go bankrupt, as Walter Williams recently said, is so that the rest of us can learn from the bad decision. AIG going under would have been a lesson to everyone else: first to those who never wondered if such a big company in precarious financial condition could have trouble fulfilling its insurance obligations, and second to other insurers who are on or thinking of going on the same path.

A friend recently got a new policy with AIG, and I pointed out the craziness of it all: his teenage daughters' future earnings are guaranteeing AIG's ability to pay out on his policy. It really is all so absurd, and it won't end.

Explaining prices, part I

A reader e-mailed me,

Not long ago when gas pump prices were below $2/g there was a differential of $.10/g for each higher octane. I know not why, but, can assume it is a fee for refining. Currently in the Va. area the differentials have been more like $.20-.25/g. No way did refining costs double. Please help me understand this.

My reply:

Hi Mike,

Apart from government mandates (which Austrian economists like me consider "interference" with prices), it's a matter of supply and demand. The cost of producing something is a baseline, because in general, sellers must charge more than the marginal cost of production, else it's simply not profitable to stay in business. After that, though, sellers will charge what the markets will bear, i.e. what price people are willing and able to pay. A major-brand station may charge 1 or even 5 cents per gallon more for the same octane level than a major-brand station across the street, when both likely get their gasoline from the same wholesale supplier. The two stations down the road from me will charge the same price, except one is pure self-serve and the other is pure full-serve. They're not even a quarter-mile apart, but the full-serve just happens to be beyond an intersection few people travel on. BTW, the difference between adjacent octane grades at both of those stations is 10 cents.

I presume you found my old post on oil prices versus gas prices. I've been meaning to revisit it but haven't had the opportunity to do analytical blogging. But in the meantime, if you follow the two links I had supplied and look at the data since, you'll see nearly the same relationship as when oil and gas prices were at these levels. Right now we're back to pre-Hurricane Katrina days, where prices depended more on the limits of U.S. refineries (refineries get expanded, but because of environmentalist lobbying, there hasn't been a new one built in 33 years).

When crude prices got so high, that influenced the price baseline far more than refinery capacity limits. The reason we saw crude near $150 per barrel was because we hit the very limit of global crude production. Everybody was pumping what they could, what rigs were physically capable of pumping and/or limits that governments set. Prices are set at the margin, so the price doesn't depend on the average price of every barrel of oil: the price for all units is the price paid for the very next unit. And remember it isn't only what you're willing to pay, but also what the next guy is willing to pay. Demand so far outstripped supply like never seen before, so though one oil trader's clients were willing to pay $70, another trader's clients might be willing to pay $75. And up and up. The same goes for wholesale gasoline.

I don't have any data on this, but I wonder how much of the demand for higher octane is because people are holding onto their cars longer, and using slightly higher octane is a way to prevent knocks and pinging. There certainly is no disincentive now that prices have come down.