Today, the Congressional Oversight Panel for the Treasury’s Troubled Asset Relief Program, headed by Elizabeth Warren, is holding a set of hearings on failed
“„When a company digs itself so deeply into debt that it cannot escape, our legal system provides a set of strict and simple rules to force the business to bear as much of the cost of its mistakes as possible and to minimize the impact on others. Of these rules, two are paramount. First, the business’s owners — its shareholders — lose everything. Second, the business’s creditors — including its bondholders and counterparties — lose money, and depending on how deep the hole, they could lose a great deal.
“„The rules may seem harsh, but they are fundamental to the functioning of a free market. After all, the parties that gain the most when a business succeeds should also lose the most when a business fails.
“„I open today’s hearing by listing the rules of bankruptcy because we are about to examine a bankruptcy that broke all the rules. In fact, the rescue of the American International Group was so extraordinary that it bypassed the entire legal process of bankruptcy. In saving AIG, the government invented a new process out of whole cloth, a parallel set of rules devised and executed for the benefit of only one company.
“„By the time the federal government intervened in late 2008, AIG was a poster child for the need for a well-functioning bankruptcy system. Its stock price had plummeted 79 percent in only two weeks. The sharp decline in mortgage-linked asset prices and the failure of Lehman Brothers had led to staggering collateral calls from AIG’s counterparties, and AIG simply did not have enough cash on hand to keep its doors open.
“„The next steps would ordinarily have been straightforward. Under the rules that applied to everyone else in America, AIG’s shareholders should have lost everything, and its creditors should have taken substantial losses. Yet even today AIG continues to trade on the New York Stock Exchange, and no creditor has lost a penny on its dealings with the company.
“„Put another way, under the rules that applied to everyone else in America, the costs of AIG’s mistakes should have been borne by AIG and its partners. But under this new, ad hoc set of rules, the costs of AIG’s mistakes were borne by the rest of us – the American taxpayers.