A Graduate Course In Extortion

AIG is conducting a graduate course in extortion, costing you, me, and the government billions of dollars. If AIG is allowed to collapse, it could lead to global systemic meltdown of the world's financial systems, and they know it.

AIG warned of turmoil around the globe if the government allowed the insurer to fail, adding “it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce.” The value of the U.S. dollar might fall, Treasury borrowing costs could rise and the agency would face “doubts about the ability of the U.S. to support its banking system,” according to the presentation, parts of which were reported earlier by the New York Times.

Under the scenarios sketched by AIG, European banks that bought credit-default swaps might need to raise $10 billion in capital and could face rating downgrades. Life insurance customers, their faith shaken in the industry, would redeem some of their $19 trillion in U.S. policies, overwhelming firms already weakened by the credit crisis, AIG said.

The $38 billion in support provided by the firm to money- market funds would be in jeopardy, AIG said, possibly forcing some to “break the buck.’’ The term refers to a money fund that suffers losses so large that it must pay investors less than the traditional $1-a-share value that gives the short-term funds their reputation for safety.

It would be the collapse of Lehman, only much, much worse. The longer Obama refuses to pull the plug however, the worse the results will be when AIG finally gives out under its own weight of debt. Eventually, Congress will revoke Obama's credit limit for bailing out AIG, and when that happens...

Outside the U.S., where AIG operates in more than 140 countries, a collapse could lead to the “immediate seizure’’ of its businesses by regulators and could impair “the entire insurance industry within certain regions,’’ the presentation said, which added that its conclusions were “speculative’’ and a matter of judgment.

“Who knows if what they’re saying is true?’’ said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “A lot of it sounds like conjecture, that if AIG collapses the rest of the industry will, too. It’s a way of creating a crisis atmosphere and the sense you have to respond quickly.’’

Ahh, but investigating if AIG's collapse would indeed cause a global meltdown would reveal to the world that the global financial system itself is already insolvent. But Obama is running out of plays to call. In fact he's down to three, Muddle Along, Plan N, and Let 'Em Fail. Muddle Along is rapidly approaching the point where it's no longer a going concern. Congress will start demanding one of the two other actions. That leaves Plan N and Let 'Em Fail.

Democrats want Plan N. As we saw this weekend, the GOP wants Let Em' Fail. Now, remember the GOP plan: Destroy Obama, regain power. If Obama indeed lets AIG go under, and it nukes the financial system, they win. Of course they want the big banks to fail. They know doing so will take Obama with them.

So that really leaves Plan N, which the Republicans will now fight with every breath in order to either play out the clock with obstructionism so that something fails anyway, or force a failure by populist dint.

While AIG is certainly showing the government a graduate level course in extortion, the GOP is running a post-doctorate thesis in the long con, one where Obama gets pinned with the collapse of the banking system that they created themselves and Obama then inherited from Bush.

Thus, Obama has to risk the rest of his political capital on Plan N almost immediately. If he doesn't make the bold play, the GOP will eventually cut him off at the knees and the whole system will go under. Shelby doesn't want the banks to fail. He wants Obama to fail. The GOP is counting on an ignorant, angry populace to call for these taxpayer supported zombie banks to be put down the hard way, which would of course collapse it all and become Obama's Depression overnight.

Of course, the whole system might go under anyway. But Plan N is Obama's best (and only viable) option...and that goes for the rest of the world as well.