Use taxpayer dollars to build an AIG competitor

AIG supports some competition, why not more?

It seems AIG bonuses are destined to be a seasonal occurance – the once and future controversy . The latest news is from The Washington Post, which reports AIG wants the okay to pay $2.4 million in bonuses to its executives. Cue the outrage.

Does anyone like this solution? AIG employees don’t like it, because everything they do is subject to scrutiny and at their worst they get holier than thou. Taxpayers don’t like it because we’re stuck supporting the greedy incompetents who helped get us into this economic mess – especially when they turn around and hand $28 million for the right to grace the shirts of the punters like this one. The government can’t like it because, well, people don’t like it. And eventually, there will be an election again.

Why shouldn’t the government  do something that will do something to really punish AIG, please a lot of taxpayers and, heck, even some of the right wingers – start an AIG competitor?

The real reason AIG was bailed out wasn’t because it was hard up from bad derivatives – they were, but not so badly as to force a bailout in and of itself. The primary reason is a business you hear a lot less about – AIG insures and manages state, local and pension fund assets (over $72 billion according to AIG’s website today and certainly more last autumn). If AIG went under, a whole lot of pension funds, cities and even states suddenly would have had trouble accessing their assets and the structured products they invested bond revenue and retiree contributions in (and probably shouldn’t have in the first place) would have failed. It wasn’t the prospect of AIG failing, but the prospect of an AIG failure bringing about municipal bankrupticies that led to the $200 billion and counting federal bailout.

So if the government is really worried about the effect on Mom and Pop’s pension and state assets, take the bold step of shifting some of the billions they send to AIG into founding a new quasi-governmental company that will focus on creating insurance policies for pension fund and municipal needs, working on the nitty gritty of muni bond strategies and investing and managing the assets of those states. It can be done – this corner of the financial world is a little dusty, so there are experts who are underutilized and could easily be poached to work for the new entity (from AIG even), municipalities certainly would like a viable option to many of the niche services AIG fulfills because competition lowers their costs and improves the service they receive, and taxpayers could get some satisfaction that a new corporation is pushing into AIG’s trough. Best of all, the government promises the new company will go public eventually, selling the shares into the market, getting taxpayers their money back and providing a big payday for those financial experts who were smart enough to join the new company early on. This also goes right to the heart of what a true capitalist should want for our country – competition.

What we’re doing right now is half hearted and certainly won’t do much to change AIG’s hedge fund-like culture or make taxpayers feel as if the punishment fits the crime. In uncertain times, a little daring will go a long way.

Photo of Ben Foster courtesy of Manchester United. Image has been cropped by me.