AIG & Bipartisanship: Perfect Together!

When all else fails to unite Democrats and Republicans, bring on the Sharks.

You’ve got to hand it to those executives over at AIG. How did they know that what the country needed most – namely a united political front – was just a handful of bonuses away. With such superior insightfulness, no wonder the economy is booming! Witness the following morsels of bipartisanship. Senate Minority Leader Mitch McConnell, you’re up first. "It is an outrageous situation. If you are going to take the government as a partner, the message to any business out there...is 'lets enter into a bunch of contracts real quick and we'll have the taxpayers pay bonuses to our employees.' This is an outrage." Next up, Republican senator Chuck Grassley of Iowa was somewhat more adept in his use of colorful metaphors. “The first thing that would make me feel a little bit better towards them, if they had followed the Japanese example and come before the American people and take that deep bow and say, "I'm sorry," and then either do one of two things, resign or go commit suicide.” Grassley eventually backtracked from the comments.

From the other side of the aisle, "There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," said Larry Summers, chairman of the White House National Economic Council, appearing on ABC's This Week. But Summers also said there didn’t appear to be anything the government could legally do to prevent the bonuses from being paid out. "It is wrong," said Rep. Barney Frank, the chair of the House Financial Services Committee on Fox News. "This is an example of people at the commanding heights of the economy misbehaving, abusing the system." The last time Democrats and Republicans were this much in agreement, Moses was parting the Red Sea, or was that Noah building an arc. It’s hard to tell; it was so long ago.

But to get serious here, the AIG fiasco is but a microcosm of the economic nightmare that is living itself out in front of our very eyes. And before this nightmare is over millions of people will be devastated financially, and millions more will be adversely affected in a profound way. My fear is we may not have even hit bottom yet. We are tempted to think that this recession began in 2008, but in reality it had its genesis nearly ten years ago during the Clinton Administration. It was in November of 1999 that Bill Clinton, bowing to pressure by Congressional Republicans and deeply wounded politically by the Monica Lewinsky affair, signed into law the Financial Services Modernization Act, which basically did away with the restrictions imposed by the Glass-Steagall Act of 1933, one of the core tenants of Roosevelt’s New Deal. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each-others’ industries, and investment banking and commercial banking were separated. The significance of this Act cannot be overstated enough. Banks, heavily regulated, were now free to acquire financial services institutions, which weren’t under the careful scrutiny of regulatory agencies. Citigroup was basically born out of the new Act.

For over 65 years the old law acted like a damn to stem the currents of unbridled market forces, and the result was decades of relative economic stability, with the occasional recession here and there to remind the country of the inherent shortcomings of a capitalistic society. The fact that we have not had anything as devastating as the Great Depression since the 1930s, was proof that the Glass-Steagall Act, like so many similar regulatory laws, was working. Repealing it was bad enough, but when Congress failed to enact any meaningful regulations to monitor the new financial institutions that were being formed, they invited the ensuing disaster.

Now the Obama Administration, owing to the public outrage, is acting to bring these “hybrid” corporations under regulatory control realizing that they can’t put the toothpaste as it were back in the tube. Treasury Secretary Timothy Geithner proposed Thursday a drastic expansion of federal regulation covering the market's major players. Geithner's proposal, outlined in testimony to Congress, would provide for government oversight of secretive hedge funds. It also would mandate strict regulation of exotic derivative contracts such as credit default swaps that were blamed for much of the financial meltdown.

Speaking to the House Financial Services Committee, Geithner said the markets have become "too unstable and fragile." He added, "To address this will require comprehensive reform; not modest repairs at the margin, but new rules of the game. We need much stronger standards for openness, transparency and plain commonsense language throughout the financial system."

The plan, which requires congressional action, would set most standards for financial reporting on firms deemed "too big to fail," or those that could threaten the economy in a collapse. The biggest institutions, under rules to be drafted, would answer to a single agency. Geithner's plan also would require hedge funds and other private pools of capital to register with the SEC if their assets exceed a threshold to be set.

While Democrats were largely supportive of Geithner’s plan, many Republicans were skeptical of giving the federal government that much power, with some of the usual suspects (thought I forgot about you, Fox?) even going so far as to call it socialism. Well so much for bipartisanship.

In truth, Geithner’s plan is the least that can be done to not only regulate this new part of the economy, but to prevent a repeat of this calamity. In all likelihood it is too late to break up these institutions, at least not in the manner that some have suggested, but it is vital to the nation’s economic health that systemic risk be minimized. The specter of a Citigroup or J.P. Morgan Chase or A.I.G. going under and possibly taking several other institutions with them, is a risk no responsible president can permit. Give this much credit to Obama, whether you agree with his policies or not, he is a far better steward of this economy than his predecessor. And that is something we can all be grateful for, in a time when gratitude is hard to come by.