Yesterday the Federal Reserve agreed to provide AIG with an additional loan for up to $37.8 billion to help improve the liquidity of its securities lending business. This amount is in addition to the $85 billion loan from the Fed, $61 billion of which has apparently already been drawn down by AIG. On the one hand, the additional loan to AIG is just another in a series of steps aimed at trying to shore up troubled companies. On the other hand, its timing has sparked renewed concern and outrage on the part of the public. This is because the new loan came just one day after Congress expressed its own outrage and frustration with AIG executives not only for their seeming refusal to admit any wrongdoing, but also for spending some $440,000 on a retreat just days after the federal bailout—called "pretty despicable" by the White House press secretary. The Washington Post blog is filled with comments about AIG, and the comments are almost uniform in their stinging criticism. There were at least two overarching concerns captured by the comments.
First, commentators suggested that the Fed’s decision appears to confirm the public’s suspicion that government will provide money to ailing companies without being willing or able to hold management accountable. Thus, many comments consisted of complaints that, instead of seeking ways to hold management accountable for what Congress viewed as improper behavior, the act of providing additional funding appeared to be rewarding them or at the very least not sanctioning such behavior. As one post noted, “the AIG Executives are probably saying to themselves, ‘what is Congress going to do to us, nothing.’” In this regard, this issue with AIG adds to the perception not only that corporations are being bailed out for their own mistakes, but also that corporate executives feel free to make those mistakes without any fear of repercussions. To be sure, AIG offered many reasons for their decision to host the retreat. Apparently the retreat had been planned before the bailout and was aimed at rewarding independent life insurance agents for their successes. Then too, an AIG spokesperson pointed out that the retreat was important because it rewarded those aspects of AIG that were self-sustaining, thereby increasing the likelihood that they would remain healthy. Hence, AIG executives did offer some business justifications for the retreat. Moreover, there may be no connection between the retreat, the companies need for additional cash, and the government's decision to provide that cash. Yet when viewed together, the decisions feed into the public’s perception that their tax money will be lent to executives who will not be held accountable.
Second, as one person put it, “this is exactly what the taxpayers were concerned about . . . life as usual for the Wall Street executives while we, on Main Street and other streets, suffer the consequences.” This comment captures two sentiments. The first is the concern that these kinds of retreats represent standard business practices, even though many—though not all—of those who commented on such practices found them to be problematic. The second is the concern that such practices will remain unchanged despite the fact that many in the public will have to make changes in their way of life. Indeed, it seemed that even those who recognized that it may be appropriate to reward people for their service to the corporation had problems with such a reward coming on the heels of an $85 billion bailout. Initially an AIG spokesperson indicated that several AIG firms planned to go ahead with other social and business events, and pointed out that these kinds of events happen all the time. His comments sparked outrage because they seemed to confirm the public’s fear that they would be asked or required to tighten their belts without any corresponding tightening on the part of executives.
To be sure, AIG’s CEO said that he would be “reevaluating” the costs of all operations "in light of the new circumstances" underwhich the company would be operating, and in fact apparently AIG now has canceled another scheduled retreat. Nevertheless, this back and forth with AIG feeds into the generally negative public perception about the bailout, its implementation, and those in charge of that implementation, making it that much harder to restore confidence.
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1. Posted by Jake on October 9, 2008 @ 20:52 | Permalink
Obsessing over $440,000 for an AIG retreat, in light of the $85 billion (plus much more) Fed bailout, does miss the mark at bit. But one wonders why the Fed, given its fervor to hurl public money at AIG, has not yet found time to deliver a pink slip to AIG's CEO.
2. Posted by fedgovernor on October 10, 2008 @ 1:49 | Permalink
" ... commentators suggested that the Fed’s decision appears to confirm the public’s suspicion that government will provide money to ailing companies without being willing or able to hold management accountable."
But honey, "government" didn't loan AIG any money. The Fed, on the other hand, did. But the Fed is a private bank. It's regulated by our government, just as many businesses are, but it's a private bank.
That is why the Fed did not require any special permission to lend money to AIG in the first place. The Fed already has that permission since it's chartered, like all other banks, by the government.
People don't understand this, because folks like you perpetuate the myth that the Federal Reserve is somehow "the government" when it isn't. Our banking system is private (or will be until the end of the month, when the government nationalizes it.)
The Fed is in the business of loaning money to other businesses for interest. They don't usually do it retail, but it's not unprecedented.
The fact that the people don't understand this is testament to the liberal educational system we have in this country and the financial illiteracy of journalists.
3. Posted by fedgovernor on October 10, 2008 @ 1:54 | Permalink
Incidently,
The Fed could, in one moment, order its member banks to lend to each other at the discount rate +1% and end the credit freeze overnight.
It has not done so, because what the Fed is doing to our economy is intentional. Our government is powerless to stop them.
4. Posted by Jake on October 10, 2008 @ 19:58 | Permalink
Harrumph. Addressing Professor Fairfax as "honey" is a mark of discourtesy and poor judgement. Mind your manners, sir.
5. Posted by Kimberly Smith on August 6, 2009 @ 16:11 | Permalink
I am 23 years old and Have had 2 serious knee surgerys due to being born with legs that bow inward, it has been a struggle. My boyfriend of 10 yrs! has always had a job since the age of 9 yrs. through logging in a family business and eventually working doing Construction, Carpentry, and roofing for the last 7-8 years. He fell of a roof last August and it resulted in Ankle surgery and is still messed up. He has been cleared to go back to work while he is trying to settle but there is NO work. He was on unemplyment until he had his surgery. He can't collect any unemployment while waiting to settle and AIG is not responsible to pay him and just deduct it out of his settlement money. It has been 4 months since he has recieved any money. We are behind on everything and lost our car insurance and soon to have all our utilities shut off. I hope they keep people in our position in mind and maybe something can be change because living like this is cruel and i am very thankful i do not have any children because it is hard enough to feed ourselves let alone a family.
6. Posted by Kimberly Smith on August 6, 2009 @ 16:22 | Permalink
I am 23 yrs old and have had 2 major knee surgerys due to the alignmaent of my bones, it has been a struggle. My boyfriend of 10 yrs! Has always had a job starting at age nine logging in a family business and for the last 7-8 yrs he has worked construction,carpentry, and roofing. He fell of a floor joyce on the job and it resulted in a ankle surgery in August. He has decided to settle. After speaking to a lawyer we found out that AIG was not going to be responsible to pay him any money and deduct it from the settlement balance and he can't find ANY work. He can't collect unemployment until the settlement. He has not recieved any money in 41/2 months and we are behind on EVERYTHING and lost our car insurance and our car is broke down. Our utilities are on the verge of being shut off and are practically starving if it weren't for my family we would be homeless.
Hearing about the bail out makes you feel a little sick and maybe somebody can change something because living like this is cruel. I'm glad I don't have a family to worry about. I hope people start to have a little humanity.
7. Posted by router bits on January 1, 2012 @ 18:29 | Permalink
I feel sad for the last comment. That is why it is very important to have a stable and good paying job to be able to withstand the different financial struggles that anyone else may experience.
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