The AIG buyout

So the government's joined the private equity business. It got a pretty hefty start, buying out AIG. 

David Zaring:

Emergencies are emergencies, and when that happens the rules go out the window, and hopefullly regular elections mean that the officials the people trust are dealing with the emergency. Abraham Lincoln adopted that reasoning, and he won the Civil War. I suspect we're at the "anything goes in an emergency" stage of things. But maybe reasonable minds could disagree.

Gordon Smith:

In short, this move is not aimed at protecting AIG's policyholders, but rather at protecting the financial institutions that purchased AIG's credit-default swaps. Moral hazard, anyone?

Was this an emergency? Consider the exigencies I noted yesterday. But is this really 9/11? One might say that it’s more like Pee Wee Herman: a bunch of grownup companies living in a child's world in which real estate prices always go up. When they go down, should we prop up the stage set anyway?

On the other hand, maybe we should disregard whether Wall Street acted rationally in the first place and focus on the current mess. 

I'm still not sure.  But my problem isn't moral hazard. The firms acted heedlessly of the real risks.  I doubt in the future that similarly run firms would be acting on the expectation of a government bailout.

Rather, the problem is agency costs. Is the significant short-term dislocation from an AIG failure worse than the agency costs of having the government run a multi-billion dollar business? Think of Fannie and Freddie, where the government's interest was less direct than here. Speaking of Pee Wee Herman, can there be anything worse than having the US Congress as a board of directors?

More on agency costs from Dealbreaker:

If the money lent out to AIG is not paid back, Hank Paulson and Ben Bernanke will not suffer financially. If you ever wanted to see an agency cost roaring, the AIG takeover is your dream come true. What's more, the deal allows government officials the rare thrill of feeling that they are not only very, very relevant. They are now the masters of the universe, the warrior kings of Wall Street.

Comments

[Stacia Erckenbrack]

Still trying to understand the details of the buyout/deal so that it is easier to "swallow", probably do not know enough to comment.

But it seems like they are taking a "hard-money" loan from the government that tax payers will have to pay after some of these same tax-payers have lost their own homes and businesses.
Some people lost homes because of poor plamming etc., but some lost homes out of illness, death of spouse, or family tragedy(disability etc). These people are to repay this loan to "fix" the woes of this entity in the private business sector.....interesting.