Steve Miller of AIG Says Wall Street Bailouts Were Necessary, I Say Miller Is Full of It

Stop me if you have heard this one before-"Wall Street needed bailed out or else the world economy would have gone over a cliff."  That's it, end of story.  The possibility that anything but grey skies and storm clouds waited over the horizon of actually letting capitalism work its self regulating and detoxifying magic can't and won't be considered for it would drive a nail into the idea that government must step in to perform miracles of engineering prosperity out of thin air.

Much to the aggravation of those who understand how a market economy really works, Steve Miller, chairman of American International Group Inc., recently made an appearance on Bloomberg Television in order to justify his company's miraculous achievement of having enough friends in Washington to socialize their losses with taxpayer dollars:

Nov. 16 (Bloomberg) -- American International Group Inc. Chairman Steve Miller, who joined the bailed-out insurer's board in 2009, said Occupy Wall Street protesters have a "simplistic view" of the economy and government rescues of financial firms.

"The understanding of the Occupy Wall Street crowd of what makes our country work is probably fairly limited," Miller told Betty Liu today on Bloomberg Television's "In the Loop." "It's a very simplistic view of things. No one will ever know what would have happened to our country and our whole global financial system if AIG had been allowed just to go down."

"It's lost on them," he said. "They think, 'Why are you bailing out Wall Street and not Main Street?' You have to have a view as to what would have happened if Wall Street had been allowed to just implode. I think it would have been devastating for our whole economy and that would have been far worse for Main Street than what did happen."

Yes, it is absolutely true that no one could truly predict what would happen if AIG and the rest of Wall Street were allowed to fail like any other private company.  As the great Leonard Reed pointed out in his wonderful essay "I Don't Know,"  it is impossible to know what direction the unpredictable but purposeful action of billions of individuals known as a market will bring.  However, there is a good, though imperfect, example of what failure can bring if allowed to occur.  From a recent Yahoo! News piece:

Three years after Iceland's banks collapsed and the country teetered on the brink, its economy is recovering, proof that governments should let failing lenders go bust and protect taxpayers, analysts say.

The North Atlantic island saw its three biggest banks go belly-up in the October 2008 as its overstretched financial sector collapsed under the weight of the global crisis sparked by the crash of US investment giant Lehman Brothers.

The banks became insolvent within a matter of weeks and Reykjavik was forced to let them fail and seek a $2.25 billion bailout from the International Monetary Fund.

As David Howden points out however, it wasn't a perfect solution:

While Iceland's reemergence over the last two years has been mostly strong, there are still two unfortunate consequences to address.

First, by focusing on consequences and not root causes of its crisis, Icelandic authorities have missed an opportunity to correct one of the crisis's primary causes. The moral hazard of deposit insurance — especially a deposit-insurance scheme that was impossible to honor — allowed for the oversized banking system to develop. Removing such an insurance scheme would do much to rectify this issue.

Second, Iceland is not alone in this regard. Several other countries of the world are also at a juncture where large amounts of foreign-denominated liabilities are unable to be funded by the domestic central bank. This in itself would not be a large problem, except for the fact that so many do think that they central bank will be able to solve the eventual funding gap.

While it's hard to imagine the IMF would jump in to save the day had the U.S. let the big banks fail come the fall of 2008, other factors from that time period show the falsity of the oft-spouted assumption that had Wall Street gone down, so would have credit lending to business which is a primary driver of the economy.  As Tom Woods showed in his best seller Meltdown, 80% of corporate lending was done outside the traditional banking system come Lehman Brothers' collapse.  Even in the midst of the hysteria that dominated Wall Street and the halls of Congress during October 2008, there was no decline in business loans.

There is also that little thing called the Austrian Business Cycle Theory, developed by Ludwig von Mises almost a century ago in The Theory of Money and Credit, which, when applied correctly, was used by many Austrian economists to foresee the crisis.

In the end, it isn't surprising Miller has nothing but praise for the Wall Street bailout as the company he chairs was one of the main recipients.  Purposeful action applies to profit seeking entrepreneurs and those who refuse to bite the hand that feeds them just the same.  The only difference is the heavy, violent hand of government which aids the latter.

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I should point out that this exact debate is raging over at Policymic.com right now.

To follow up on my post about Congressional "Insider Trading," here is a list of Congress members' top favorite stocks (ht The Big Picture):

1. General Electric (GE)
Members invested: 75
Total value of holdings (max.): $11.41 million
Total value of holdings (min.): $3.58 million
Top Congressional Investors
Darrell Issa (R.-Calif.) – $1 million to $5 million
John Kerry (D.-Mass.) – $616,004 to $1.315 million
Michael McCaul (R.-Texas) – $400,003 to $850,000

2. Procter & Gamble (PG)
Members invested: 62
Total value of holdings (max.): $39.42 million
Total value of holdings (min.): $8.72 million
Top Congressional Investors
Rodney Frelinghuysen (R.-N.J.) – $7.07 million to $35.15 million
Michael McCaul (R.-Texas) – $200,002 to $500,000
James B. Renacci (R.-Ohio) – $180,485 to$222,482

3. Bank of America (BAC)
Members invested: 57
Total value of holdings (max.): $5.41 million
Total value of holdings (min.): $2.83 million
Top Congressional Investors
Rodney Frelinghuysen (R.-N.J.) – $1.02 million to $1.08 million
John M. Spratt Jr. (D.-S.C.) – $500,001 to $1 million
Dianne Feinstein (D.-Calif.) – $500,001 to $1 million

4. Microsoft (MSFT)
Members invested: 56
Total value of holdings (max.): $6.43 million
Total value of holdings (min.): $3.22 million
Top Congressional Investors
John Kerry (D.-Mass.) – $1.77 million to $2.55 million
Michael McCaul (R.-Texas) – $515,003 to $1.05 million
Jane Harman (D.-Calif.) – $130,003 to $350,000

5. Cisco Systems (CSCO)
Members invested: 56
Total value of holdings (max.): $3.24 million
Total value of holdings (min.): $1.27 million
Top Congressional Investors
John Kerry (D.-Mass.) – $602,005 to $1.28 million
Richard L Hanna (R.-N.Y.) – $100,000 to $250,000
Jane Harman (D.–Calif.) – $100,000 to $200,000

6. Pfizer (PFE)
Members invested: 51
Total value of holdings (max.): $4.61 million
Total value of holdings (min.): $2.04 million
Top Congressional Investors
John Kerry (D.-Mass.) – $752,004 to $1.53 million
F. James Sensenbrenner Jr. (R.-Wis.) – $507,005 to $1 million
Kurt Schrader (D.-Ore.) – $265,002 to $550,000

7. Intel (INTC)
Members invested: 47
Total value of holdings (max.): $3.21 million
Total value of holdings (min.): $1.28 million
Top Congressional Investors
John Kerry (D.-Mass.) – $602,005 to $1.28 million
Michael McCaul (R.-Texas) – $200,002 to $500,000
Jane Harman (D.-Calif.) – $130,003 to $350,000

8. Wells Fargo (WFC)
Members invested: 45
Total value of holdings (max.): $4.28 million
Total value of holdings (min.): $1.71 million
Top Congressional Investors
John Kerry (D.-Mass.) – $351,003 to $765,000
Sander Levin (D.-Mich.) – $250,001 to $500,000
David Vitter (R.-La.) – $126,007 to $365,00

9. AT&T (ATT)
Members invested: 44
Total value of holdings (max.): $4.08 million
Total value of holdings (min.): $2.23 million
Top Congressional Investors
John Kerry (D.-Mass.) – $1.52 million to $2.07 million
F. James Sensenbrenner Jr. (R.-Wis.) – $105,877 to $255,876
Richard L Hanna (R.-N.Y.) – $100,001 to $250,000

10. Exxon Mobil (XOM)
Members invested: 42
Total value of holdings (max.): $11.09 million
Total value of holdings (min.): $2.74 million
Top Congressional Investors
John Carter (R.-Texas) – $1 million to $5 million
F. James Sensenbrenner Jr. (R.-Wis.) – $551,185 to $1.05 million
Michael McCaul (R.-Texas) – $500,002 to $1 million

Hmm...see a pattern emerging here? Cause I sure do.

Update- Just wanna make sure I record this for future reference:

MADRID, Nov 17, 2011 (AFP) - Finance Minister Elena Salgado insisted Thursday there was no risk that Spain would need to be bailed out to rescue it from its huge debts.
Spain is "absolutely not at risk of a bailout," Salgado said on Cadena Ser radio, after rates for the government to borrow money rose to dangerous levels.
"The sustainability of our debt is beyond all doubt."

It's hilarious because you know it's a damn lie.

Update 2- Great observation from Pater Tenebrabrum:

Speaking of banks and their exposure to euro area stresses: the US banking system continues to cleverly hide the true extent of its derivatives related exposure to Europe.  However, we know from the BIS that they hold about $520 billion in notional exposure to sovereign euro area CDS alone. To put this number in perspective: it amounts to about 60% of the entire capital of the US banking system. Now, it is of course clear that when everything is 'netted out'  their exposure will look far smaller – alas, 'netting out' means that they must rely on all counter-parties in the derivatives chain performing, a heroic assumption indeed when it comes to over-the-counter derivatives (see the AIG case). In fact, since contracts can be sold multiple times, it is impossible to know for sure who all the counter-parties involved actually are. At the end of a long chain there could be some mud hut in Calcutta as the ultimate guarantor. We are of course oversimplifying here, but it has been shown on multiple occasions that it is nigh impossible to consistently track a large otc derivatives book. Fannie Mae once need a 2,000 strong army of outside accountants to sort out its derivatives positions and it took them six months to do so. So there is no point in asserting that the big derivatives dealers have 'everything under control' – they haven't, because it is simply not possible. The OTC swaps market has by the way grown to a size of more than $708 trillion in notional terms, up 18% over just the past year.

Such is the ingenious of the shadow banking system.  See this hilarity as well:

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.
Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.
As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

Occam's razor strikes again: Goldman and J.P. most likely don't have a clue on their derivative positions so they can't give any answer with certainty.  While some see the shadow banking system as a kind of twilight zone type hell hole of financial gobbledygook, it's fascinating from the perspective of seeing what human ingenuity is able to accomplish.