Morici: Time is running out for Obama to fix what's broken with economy

http://www.thestreet.com/story/10775585/1/time-is-running-out-for-obama.html?cm_ven=GOOGLEFI

by Peter Morici
6/7/2010

Either President Obama fixes what's broken in the economy, or he will be remembered for spending his entire first term blaming George Bush.

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The recovery is faltering because U.S. businesses lack customers to justify new employees and the capital to expand, and they want help on both scores.

Demand for U.S. products is growing just 2% a year because of a gapping trade deficit -- purchases of oil and from China are sending too many dollars abroad that don't return to buy U.S. exports

Businesses don't have the capital they need, because the TARP did not fix the balance sheets of the 8,000 regional banks, which finance most small and medium-sized businesses. Instead, it was used by the Bush and Obama administrations to finance more trading and big bonuses at Wall Street banks.

The rescue of AIG distorted the marketplace by transforming highly risky derivative bets into fully guaranteed payment obligations. In the ordinary course of business, the costs of AIG‟s inability to meet its derivative obligations would have been borne entirely by AIG‟s shareholders and creditors under the well-established rules of bankruptcy. But rather than sharing the pain among AIG‟s creditors – an outcome that would have maintained the market discipline associated with credit risks – the government instead shifted those costs in full onto taxpayers out of a belief that demanding sacrifice from creditors would have destabilized the markets. The result was that the government backed up the entire derivatives market, as if these trades deserved the same taxpayer backstop as savings deposits and checking accounts.

One consequence of this approach was that every counterparty received exactly the same deal: a complete rescue at taxpayer expense. Among the beneficiaries of this rescue were parties whom taxpayers might have been willing to support, such as pension funds for retired workers and individual insurance policy holders. But the across-the-board rescue also benefitted far less sympathetic players, such as sophisticated investors who had profited handsomely from playing a risky game and who had no reason to expect that they would be paid in full in the event of AIG‟s failure. Other beneficiaries included foreign banks that were dependent on contracts with AIG to maintain required regulatory capital reserves. Some of those same banks were also counterparties to other AIG CDSs.

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Through a series of actions, including the rescue of AIG, the government succeeded in averting a financial collapse, and nothing in this report takes away from that accomplishment. But this victory came at an enormous cost. Billions of taxpayer dollars were put at risk, a marketplace was forever changed, and the confidence of the American people was badly shaken. How the government will manage those costs, both in the specific case of AIG and in the more general case of TARP, remains a central challenge – one the Panel will continue to review.

http://money.cnn.com/2010/06/04/news/companies/aig_payback/

AIG repayment prospects fade

By David Goldman, staff writerJune 4, 2010: 4:53 PM ET


NEW YORK (CNNMoney.com) -- Taxpayers have lent AIG $132.6 billion, but getting that money back is looking less likely.

The sale of AIG's Asian life insurance unit for more than $35 billion would have helped a lot, but the deal went bust this week when the buyer, Prudential PLC, sought a lower price.

Now the troubled insurer is essentially back to square one with its repayment strategy -- though AIG Chief Executive Robert Benmosche remains upbeat about the options regarding AIA, and maintains that AIG will pay back its loans in full.