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Mommy! The Government Made Me Do It!(V)
By John F. McGowan
Version: 1.0Start Date: March 17, 2009Last Updated: March 17, 2009Home URL: http://www.jmcgowan.com/Mommy5.pdf 
The editors of the Wall Street Journal blame the government for the AIG (American International Group) financial bailout fiasco in a March 17, 2009 editorial titled “The Real AIG Outrage”. Here is why they are wrong.
Introduction
In today’s
Wall Street Journal 
(“The Real AIG Outrage”,
Wall Street  Journal 
, Tuesday, March 17, 2009, Page A14) the editors of the
Wall Street Journal 
blame the AIG financial bailout fiasco on thegovernment – the undefined “political class” instead of the ostensible “”private actors” 
1
. This editorial is merely one of many conservative,libertarian, and business articles blaming the financial fiasco on thegovernment rather than the senior executives of the banks that are introuble
2,3,4,5,6,7,8,9,10,11,12
.To many, especially on the Left, claims that the government causedthe financial crisis seem utterly astounding. After all, the BushAdministration was in power for eight years (2001-2009) with aRepublican Congress for six years (2001-2007). The BushAdministration was widely seen as a very pro-business, pro-freemarket, anti-regulation Administration. The Federal Reserve washeaded first by Alan Greenspan, a former devotee of free marketadvocate Ayn Rand and a Reagan Administration appointee, and thenby Ben Bernanke, a monetarist. Over the last thirty years a variety of Depression era regulations of the financial industry such as the Glass-Steagall act have been repealed or weakened either by legislation (theGramm-Leach-Bliley Act of 1999, aka the Financial ServicesModernization Act of 1999) or by regulators. How then could any saneJohn F. McGowanPage
1
March 17, 2009
 
Mommy! The Government Made Me Do It! (V)
person blame the government?Blaming the government is nothing new. Conservative, libertarian,and business writers, publications and think tanks (such as the
Wall Street Journal 
editorial page) have a long history of blaming thegovernment for economic and financial fiascoes that followed theadoption of public policies initially billed as “free market”, “deregulation” or similar terms
13
. Often these policies turn out onclose examination to be selective deregulation or changes inregulations that favor certain firms and individuals. Previous examplesinclude the Great Depression, the savings and loan deregulation fiascoof the 1980’s, the failure of conservative author George Gilder’s hightech investment advice in the 1990’s and the California electricitymarket deregulation fiasco of 2000. (See Appendix A)Blaming the government for the housing bubble and associatedfinancial crisis is being used to explicitly or implicitly exonerate theleaders of several very large banks that appear to be in severetrouble: Citigroup, Goldman Sachs, Morgan Stanley, and several othermajor banks. These banks appear to be surviving on over a trilliondollars in government funds from the Federal Reserve under ChairmanBernanke and the US Treasury through the Troubled Assets Relief Program (TARP). TARP has already spent $350 billion of the $700billion authorized in 2008. It may perhaps not be a coincidence thatmany TARP recipients are major advertisers in the
Wall Street Journal 
(See Appendix B). The Federal Reserve has already committed atleast one trillion dollars to support various banks. The blame thegovernment arguments are being used to argue implicitly that thegovernment, ultimately the taxpayer,
owes
the banks an ever growingamount of bailout funds. Despite or more likely because of this hugesubsidy, the US and global economy is in a tailspin.The “The Real AIG Outrage” editorial lists three major governmentscapegoats for the AIG fiasco. These are “failure to supervise” bygovernment regulators, New York Attorney General Elliot Spitzer’sinvestigation of AIG that led to the ouster of AIG CEO Maurice “Hank” Greenberg, a favorite of the
Wall Street Journal 
editorial page, and, of course, the $170 billion (and rising) government bailout andnationalization of AIG.
The editorial closes by urging that AIG bereturned to unspecified “private hands” (an investment group led by “Hank” Greenberg, one wonders?) as soon as possible, regardless of whether the taxpayers ever see a dime of their $170 billion bailout money returned.
John F. McGowanPage 2March 17, 2009
 
Mommy! The Government Made Me Do It! (V)
The Government Scapegoats
The editorial cites testimony by Stephen Polakoff, acting director of theOffice of Thrift Supervision, that AIG’s infamous Financial Productsdivision was subject to government regulation. The
Wall Street  Journal 
, probably correctly in this case, accuses the government (theBush Administration, let’s be clear) of failing to regulate AIG’sdisastrous bets on housing. The editorial uses the curious terminology “failure to supervise”. Failure to supervise has a specific legal meaningin certain investment contexts, for example brokers at brokeragefirms. A brokerage firm may be guilty of “failure to supervise” if abroker in their employ steals from a customer or engages in othermisconduct. The brokerage has a positive duty to supervise theemployee and know about and prevent abuses.Of course, during the period in question, AIG was an ostensibly privatefirm. It was not a division or subsidiary of the Office of ThriftSupervision or any other government agency (unless there are secret “Deep Black” contracts with secret government agencies that no onehas so far mentioned). Consequently, the use of the term “failure tosupervise” is curious at best. Even if there was no regulation, theofficers and directors of AIG made the bad decisions.The editorial immediately segue’s to blaming the fiasco on ElliotSpitzer’s investigation of accounting and other misconduct at AIGseveral years ago that forced “Hank” Greenberg from the CEO position.The
Wall Street Journal 
claims without citing any specific evidence thattheir long-time darling Greenberg was totally uninvolved in thehousing fiasco at AIG. Greenberg, not surprisingly, claims all the baddecisions and bets were made after he left AIG. Certainly, one mightsuspect that Spitzer had found only the tip of the iceberg in hisinvestigation and not enough was done. The
Wall Street Journal 
however is certain that it is all Spitzer’s fault.When regulators apparently fail to regulate aggressively, this is “failureto supervise” and the fiasco is their fault. When other regulators suchas Elliot Spitzer attempt to stop the abuses, the financial fiasco is theirfault. Heads, “Hank” Greenberg and AIG win. Tails, the taxpayerloses.Finally, the editorial blames the $170 billion and rising financial bailoutof AIG. But AIG was essentially bankrupt before the bailout andnationalization of AIG. The credit default swaps and the other badbets were made before the government bailed out and nationalizedJohn F. McGowanPage 3March 17, 2009
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