Risk Is Good

In 1970 Governor Nelson Rockefeller signed into law a statute in New York requiring commercial liability insurance policies to contain a pollution exclusion.  Why, might one ask, would a state require there to be less insurance for pollution cleanup?  Wouldn't it make more sense to prohibit pollution exclusions, like a couple of other states did, to make sure plenty of money was available to clean up pollution?

Well, the reasoning was sound.  Hold polluters accountable monetarily for the risk they were taking in polluting and they will take less risk.  After all, if their insurers were going to have to pay for it, why stop polluting when it is a lot cheaper to keep polluting.

The philosophy employed by the State of New York is the exact opposite of what the Fed and U.S. Government have been doing for quite some time.  The Fed fosters more risk taking in financial markets by flooding them with money at low rates and then when the boys of Wall Street do the predictable and take exorbitant risks with cheap money only to get caught with their overly leveraged pants down, good old Uncle Sam steps in and saves the day.  Be it TARP, the bailout of AIG, GM, Chrysler, GE or others, the wonderful powers that be simply will not let big over-leveraged risk takers fail.  The Fed claims it is fostering a stronger economy and economic growth by playing with interest rates and the government claims to help the economy by saving the Too Big To Fails (TBTF) from their just deserts.  Problem being that the low rates only really seem to help the top 1% to play financial games and make more money and the government bailouts take the risk out of them doing so.  This cycle guarantees one financial bubble after the next, with each getting worse and government deficits ballooning all the while as the taxpayers pay the bill for the bailouts.

Truth be told, there are no TBTFs out there.  Rather, these are in my view TBTS - Too Big To Save.  And for the vast majority there really is not that much at stake to let them pay the price for their stupidity.  Admittedly, for corporations that employ a host of workers, like GM, consideration has to be given to not punishing the workers who are not responsible for the mess and simply take the cost out on those responsible, but even the likes of GM disappearing could have been worth the lesson and would not have brought the economy crashing.  Plenty of other car makers would have filled the void and been better off because of the void.

And consider AIG.  Its mess was simply at the holding company overloaded with credit default swaps (CDS) it had issued.  And it had issued a lot of them.  When bond or other debt obligation payments could not be made the buyers of these CDSs started knocking at AIG's door and AIG promptly knocked at the taxpayer's door.  "Please save this fine company from an untimely demise.  If AIG folds millions of policyholders will be without insurance and the financial repercussions will be the end to life as Hank - err - -we know it.  We are simply too big to fail."  Or something like that.

http://www.reuters.com/article/2008/09/18/us-how-aig-fell-apart-idUSMAR85972720080918

But the reality is that the insurance was not issued by the holding company but by an assortment of subsidiaries, all of which are tightly regulated by their respective states and all of which were financially sound.  They all had reserves, as regulators require, and regulators also required said reserves to be conservatively invested.  Thus, while the holding company had major problems, the insurance company subs did not need saving.   AIG was not TBTF, it was TBTS. 

But noooo!  We must save it.  We must put in like $182B taxpayer dollars to prop it up.  And the only folks we really helped were the risk takers.  Some of whom thanked us by sending us roses - nope - taking out a full page "Thank Y"ou in the WSJ - nah - changing their ways - of course not.  Nope, they thanked us by suing us:

http://www.washingtonpost.com/opinions/the-federal-government-gets-sued-for-saving-aig/2014/10/13/3e0db462-50c1-11e4-8c24-487e92bc997b_story.html

Maurice "Hank" Greenberg, former CEO of AIG, sued saying the bailout violated his constitutional rights.  Since when is saving his sorry arse violating his rights?  Well, if he wants a just result, we will give him a just result.  At least NY is prosecuting him for a just result.  The grand Hankmeister is being prosecuted for some illegal financial shenanigans he is alleged to have orchestrated while he ran AIG.  Said "alleged" transactions put millions more into this billionaire's pocket.  And it is this prosecution of the Hankinator that leaves us with the best quote of the year to date.  Greenberg spokesman Steve Aiello is quoted as saying Thursday that "We think [the prosecution is] an abuse of taxpayer resources, which certainly could be used for other things in New York state.”  Isn't that just precious, the Hankenstein's counsel complaining about taxpayer resources being abused!

Well, we obviously cannot rely on the Fed or the federal government to reduce risk, but hopefully the states putting a few of them behind bars my be a tad of a deterrent.