http://www.democracynow.org/2008/9/17/us_seizes_control_of_aig_with
http://www.democracynow.org/2008/9/17
http://en.wikipedia.org/wiki/Glass-Steagall_Act

...NOMI PRINS: The bailout of AIG is an example of the government
having to step in and clean up a mess. It is not so much that subprime
mortgages fell and that caused some losses to AIG. AIG was acting not
simply as an insurance company; it was acting as a speculative
investment bank/hedge fund, as was Bear Stearns, as was Lehman
Brothers, as is what will become Bank of America/Merrill Lynch. So you
have a situation where it’s bailing out not just the money, but taking
on the risk of items it cannot even begin to understand, because if it
had understood them, this would never have gotten to the point to
which it has gotten.

AMY GOODMAN: How did it get to this point? How did it go beyond
insurance?

NOMI PRINS: In AIG and in Lehman and with Merrill and every other
company on Wall Street that has faltered or is faltering, it’s about
taking on too much leverage and borrowing to take on the risk and
borrowing again and borrowing again, twenty-five to thirty times the
amount of capital, the amount of money that they had to basically back
the borrowing that they were doing. Human regular borrowers cannot do
this. This is something that is an item only of the banking industry.

And not only was all that borrowing happening, but there was no
transparency to the Fed, to the SEC, to the Treasury, to anyone who
would have even bothered to look as to how much of a catastrophe was
being created, so that when anything fell, whether it was the subprime
mortgage or whether it was a credit complex security, it was all below
a pile of immense interlocked, incestuous borrowing, and that’s what
is bringing down the entire banking system.

AMY GOODMAN: Michael Hudson, we’re talking government bailout, which
means taxpayers stuck with the bill. Do you think this is the right
move?

MICHAEL HUDSON: No, it’s the worst possible move, and it puts the
class war back in business with a vengeance. Wall Street has been
preparing for this for years, because every financial analyst knows
that the debts can’t be paid. And the question that Wall Street has,
if you’re going to take a gamble on bad debts that can’t be paid, how
are you going to come out a winner? And there’s only one way of coming
out a winner, and that’s to make the government bail you out. This has
been known for years, because it’s inherent almost in the mathematics
of compound interest. Every banker I know knew that the loans they
were making were going to go bad. They were trying to sell them to
somebody else, ultimately expecting them to end up with some sovereign
wealth fund.

And now, you had at the beginning of the show, McCain saying that this
is the result of fraud and incompetence. The government has now bailed
them out. But by bailing them out—Wall Street was coming to terms with
the bad debts. When Bear Stearns went under and when Lehman Brothers
went under, this began to wipe away the bad debts. And when the debts
exceed the ability to pay, there’s only one thing any economy can do,
and that’s wipe them out. Instead, the government is trying to keep
the fiction alive. And what Paulson did yesterday, in bailing out AIG,
was to try to lock in whoever is the next president not only to
further bailouts of Wall Street, ostensibly to protect the public
money, but to make it impossible to write down the debts of the four
million homeowners that are expected to default this year, impossible
to write down the debts of companies that have issued junk bonds,
impossible for the country to get rid of this excess of debts that
can’t be repaid. And you’re having really a war now of creditors
against debtors. And this is what Wall Street has been preparing for.
It needed an emergency to do it. It’s really not an emergency at all.
This has been building up for many years. Everybody expected it. And
breathlessly now, the Secretary of Treasury has done it.

AMY GOODMAN: But, of course, the argument was, if you don’t bail out
AIG, it could lead to a global financial meltdown.

MICHAEL HUDSON: What you—it’s a meltdown of the gamblers, as Nomi
said. These are people who’ve gambled. You had McCain saying they’re
gamblers. If these people have gambled, we’re talking about derivative
trades, billions of dollars of bets on which way interest rates will
go, billions of dollars of bad loans beyond the ability of debtors to
pay. Why on earth would you want to bail out these creditors?

AMY GOODMAN: So, what would happen if you didn’t?

MICHAEL HUDSON: Then you would prepare the ground for writing down the
debts of the homeowners that have no way of repaying the exploding
mortgages. Those interest rates are going to be jumping up this year.
You would be able to bring the debts down to the ability of the
economy to pay, and you would save these four million homeowners from
defaulting and being kicked out of their houses. Now they’re going to
be kicked out of the houses. The houses will be vacant. The cities are
going to now say, “Gee, we’re going to have to cut the property taxes
to enable the debts to be paid to save the financial system.” So, if
they cut the property taxes, they’re going to have to cut back local
expenditures, local infrastructure. The economy is being sacrificed to
pay the gamblers.

AMY GOODMAN: Nomi Prins, how has Wall Street changed? And how does
this meet everyday people? Lehman, bankrupt; you’ve got AIG
nationalized, same with Freddie and Fannie; you’ve got the takeover of
Merrill Lynch, now part of Bank of America—happened over a weekend.

NOMI PRINS: It’s insane, actually. It’s bad math, and it’s a bad
precedent, because they’re not simply bailing it out with putting
taxpayers’ money through the Fed into taking on the risks of these
companies; they’re taking on risks. They’re not bailing out and
selling debt; they are taking on the risk. They’re becoming—the Fed is
continuing to become a larger and larger hedge fund. And it’s doing it
with taxpayer money, and it’s doing it with the future debt of the
United States.

So, for the one thing, they’re not attaching any rules to these
bailouts. You know, you bail out Bear Stearns, effectively you’re
putting up $30 billion to take Bear Stearns’s junk and say, “Alright,
we’ll back the junk. JPMorgan Chase, you take Bear Stearns. We’ll back
whatever junk is there.” But there’s no decision to say, “But, you
know, you’ve got to tell us what’s there. And JPMorgan, by the way, as
you’re taking on this bank, you have to explain to us what you really
have. And Bank of America, you have to explain to us what your risks
are.”

I know that at Bank of America they were struggling with their own
risks and trying to figure out what was going on in their own company,
and now they have assumed Merrill Lynch. That creates a tremendous
institution, where the Fed is now obligated, when that starts to have
more and more trouble, which it will.

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