President's Corner

by John F. McManus, President, The John Birch Society

Failures Should be Allowed to Fail

It was only six years ago that Maurice "Hank" Greenberg, CEO of American International Group (AIG), served simultaneously as the vice chairman of the Council on Foreign Relations. No longer an official at AIG, he currently holds the post of honorary vice chairman of the CFR alongside Honorary Chairman David Rockefeller. To say that the man has long possessed "connections" is to state the obvious.

Greenberg assumed leadership at AIG in 1968. After a long reign, he was ousted in 2005 amid discovery of accounting improprieties by New York's attorney general. The company paid $1.6 billion in fines and criminal charges were levied against some of AIG's executives, not against Greenberg.

AIG is back in the news, however, because the firm happens to be the largest recipient by far of the many bailouts being dished out by the U.S. Treasury and the Federal Reserve. The giant insurance conglomerate found itself in deep financial trouble in mid-2008 and, presto, the Federal Reserve issued an $85 billion credit (later reduced to $60 billion) in September. The Fed either dipped into its ill-gotten gains or arranged the printing of new currency to stave off AIG's imminent collapse. An audit of the Federal Reserve, something never undertaken in the near-100 years of the Fed's existence, would provide an answer to where the funds came from, and to many other questions. In either case, of course, the American people are footing the bill. As a measure of their arrogance, AIG executives were enjoying a $444,000 lavish excursion within days at a plush California resort.

The initial AIG bailout wasn't enough. In October, the Federal Reserve came through with another loan of $37.8 billion. Some AIG executives immediately spent $86,000 on a luxurious hunting trip in England. Then, in November, the U.S. Treasury purchased $40 billion worth of AIG stock. This was followed by an expenditure of $343,000 for company executives to enjoy themselves at a resort in Arizona.

On March 1, 2009, the firm posted a fourth-quarter loss of $61.7 billion, the largest quarterly loss in corporate history. Total losses for 2008 added up to $99 billion. Faced with this additional bad news, the U.S. Treasury agreed to provide AIG with $30 billion more of taxpayer money. So far, more than $160 billion has been pumped into the firm, now 80 percent in the hands of the Fed-government combine.

AIG is one of many victims of the now-shattered housing bubble. In 2005, the value of the entire firm was approximately $200 billion. But its insurance commitments totaled $440 billion and, not surprisingly, policyholders whose failed properties were insured have been asking for settlements at an accelerating pace. Fed Chairman Ben Bernanke told a congressional panel on March 3rd that AIG had "exploited a huge gap in the regulatory system [and] made irresponsible bets." This shows that relying on government to police firms like AIG is akin to relying on wolves to watch the sheep. In 2008, AIG's stock sank from $70.13 to $1.25 resulting in removal of the firm from the Dow Jones Industrial Average along with huge losses for many who had invested in the firm.

The rescue of AIG is only one of many arranged for entities that "are too big to be allowed to fail" according to the experts. Fed Chairman Bernanke has claimed, "We had no choice [because] failure of financial firms can be disastrous for the economy." He, of course, isn't spending his own money. He and counterparts at the U.S. Treasury are spending the earnings of the American people. And much of this bailout money is going to foreign banks and financial institutions.

Wherever there is a truly free enterprise system, there will be failures. To say that any entity is too big to fail and should be propped up by taxpayers (through grants, credits or creating funds out of the air) is to replace the free enterprise system with socialism. The American dream isn't dead, of course, but it is very sick. Bailing out firms that should be allowed to fail is not the correct medicine, unless socialism and a destruction of America's economic freedom is the goal.

Members of Congress can put a stop to this. Every senator and representative ought to be told that failing entities should be allowed to fail. And those who exploited the gaps in the regulatory system, along with the incompetent or worse regulators, must be held to account.