Obama's Unkeepable AIG Promise

President vows "never" again on bailouts, yet his policy remains too big to fail

When then-President George W. Bush told the nation last September that normally he's "a strong believer in free enterprise," you knew that the mother of all "but"s was coming next, one that would reveal a president's true colors while ushering in a bad new era of government-is-the-solutionism. In Bush's case, the "but" was a panicky, details-don't-matter $700 billion bailout rescue of the half-frozen financial sector, preceded days earlier by an unprecedented $85 billion Federal Reserve takeover of the country's largest insurance company, AIG.

Fast forward half a year (and another $85 billion-plus doled out to AIG) to new President Barack Obama's comments about the wildly controversial and statistically insignificant $165 million bonuses paid out to AIG execs. "We believe in the free market, we believe in capitalism, we believe in people getting rich," the president said, in a brief speech every bit as revealing and ominous as his predecessor's, "but we believe in people getting rich based on performance and what they add in terms of value and the products and services that they create. And it's appropriate for us to have some regulatory mechanisms in place to ensure that we never have a situation where the government has to step in, or you've got taxpayers who are having to foot the bill for other people's mistakes."

If the president truly intends to "never have a situation" where taxpayers are "foot[ing] the bill for other people's mistakes," he'll get nothing but hallelujahs from me (and, I suspect, many other Americans). But like so many of Obama's promises, this is a pledge he will never be able to keep.

Why? It's there in the text. The president hints at a presumably achievable new regulatory mechanism that would "create a system where they can't make all these bad bets, they can't issue these insurance policies one on top of the other without having the assets to back them up"—in other words, increasing the capital requirements of financial institutions so that they can only leverage their bets so far. But all the while he continues to spend the vast majority of his public remarks talking not about the mark-to-market rule, or the opacity of the reinsurance market, or (more relevantly) the grossly distorting and moral hazard-creating influence of having the U.S. government dominate (and therefore back) the market for mortgages, but rather Wall Street's "culture" of "greed."

"People are rightly outraged about these particular bonuses," Obama said yesterday. "But just as outrageous is the culture that these bonuses are a symptom of, that have existed for far too long—a situation where excess greed, excess compensation, excess risk-taking have all made us vulnerable and left us holding the bag. And one of the messages that I want to send is that as we get out of this crisis, as we work towards getting ourselves out of recession, I hope that Wall Street and the marketplace don't think that we can return to business as usual. The business models that created a lot of paper wealth but not real wealth in this country and have now resulted in crisis can't be the model for economic growth going forward."

This paragraph raises many questions, most of them troubling. What is "excess greed," who gets to define it, how will that translate into federal policy, and what are the chances that any such policy will be good for the economy, let alone just? Does the government have any business at all declaring that a privately owned company is handing out "excess compensation" to its employees? And concerning the difference between "paper wealth" and "real worth," when did the U.S. president turn French?

Obama will not be able to prevent future bailouts by somehow eliminating excess greed, and not only because there's no way to eliminate greed. At heart, there are only two reasons AIG is now owned by you and me: It was really big, and it failed. As Obama argues, "had AIG been allowed to simply liquidate and go bankrupt, all those banks who were counterparties with AIG would have experienced such big losses that it would have threatened the entire financial system."

There are only three ways, then, to prevent taxpayer bailouts going forward: Eliminate failure, put a cap on bigness, or stop believing that bankruptcy of a single company will trigger economic collapse. None of these options are likely.

So we are left with two converging numbers: The $173 billion that the federal government has already thrown down the AIG sinkhole, and the estimated $1.9 trillion worth of policies the company insures. As long as counterparties are owed money, the U.S. government will keep shelling it out, in amounts that make $165 million look like the rounding error on a ha'penny.

Micro-symbolism can be useful in focusing outrage on a macro-scandal. To the extent that the AIG bonus fiasco throws discredit on the government's new stewardship of the finance industry, I should theoretically be joining the hate chorus (however unhinged) against the "blood-sucking bums" who are pocketing my hard-earned money after screwing their own pooch.

But there's something disproportionate, even unseemly, about screaming over molehills as mountains slip by without comment. President Obama says, "My interest is not protecting banks. My interest is protecting the American people; the people's 401(k)s; ordinary folks who have a credit line with a bank for their small business." He then proceeds to shower banks with hundreds of billions of the American people's money. There is a contradiction there, and it ain't cheap.

Matt Welch is Editor in Chief of Reason magazine.