The people are the real Uncle Sam. I am fearful that severe conflicts of interest exist in the business model and structure which must be addressed. Does AIG Iraq, Banque AIG, AIG Dubai, or Swiss bank AIG private bank give you any pause?
http://blogdredd.blogspot.com/2009/03/aig-iraq.html
What Should Uncle Sam Do?
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The recent troubles at Fannie Mae, Freddie Mac and IndyMac show just how messy things can get when the relationship between the government and the market gets too cozy. Fannie and Freddie are private for-profit concerns that operate for the benefit of the shareholders, but with government intervention both in their mission and as a source of bailout money when things go badly. This leads to both the privatization of profits with the socialization of losses and political interference in the processes of profit making and loss mitigation.
The plan advanced by Secretary [Henry] Paulson provides an open-ended source of funding for the government to buy the stock of the companies and to lend them unlimited amounts of money. While it may be a necessary last-ditch effort to save them, the plan leaves existing management and directors in place and asks for no explicit accountability for existing shareholders and other investors. Unfortunately, this appears to be related to the enormous political power Fannie and Freddie have developed through decades of political contributions and management by politically connected individuals like Frank Raines [Clinton's OMB director and former chief of Fannie Mae] and Jim Johnson [until recently an Obama adviser. Johnson was also chairman of the Goldman Sachs board's compensation committee while Paulson was its CEO].
The immediate cause of the failure of IndyMac was, according to its regulator, the release of a letter questioning the solvency of the institution by Sen. Chuck Schumer of New York. This also highlights the problems of politics and the market getting too close. While the senator was clearly within his rights to write the letter to the regulator, releasing it to the public undermined the regulator's ability to fix the institution without causing a bank run or the loss of taxpayer money. Moreover, now that pictures of people lining up outside the bank trying to get their money have been broadcast, other financial institutions may also find themselves in trouble.
These close interactions between politicians and regulated businesses sap public confidence in both government and the market. Real GSE [government-sponsored enterprise] reform and more caution on the part of politicians before interfering publicly in the business of regulators would help address these worries.
The Lessons of the Great Depression
Jeremy J. Siegel , professor at Wharton Business School
Given the turmoil in U.S. capital markets, our government had no choice but to rescue Fannie Mae and Freddie Mac. These mortgage giants, which had long been undercapitalized, had become far too important to the faltering housing market to see them go under.
Now that the government has stepped in, it is mandatory that Congress structure its investment so as to capture any gain in their stock price, similar to the profit that the government realized when it bailed out Chrysler Corp. in 1980. There is no reason that this deal should only become a "heads, the stockholders win" and "tails, the taxpayers lose" proposition.









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