After several days of saying it would not bail out the nation's largest insurance company, A.I.G., the government bailed out A.I.G. risking $85 billion of the taxpayers' money. In return, the government got 80% of the now near-worthless stock. In other countries, when the government effectively buys (nearly) all of a company's stock, it is called nationalization. Who would have thought that the Bush-Cheney administration would go Marxist-Leninist in its waning hours?
Treasury secretary Henry Paulson was clearly afraid A.I.G.'s demise would take out too many other big players and wreak massive damage on the economy. The move will be very controversial since it risks public money to protect bad investments made by A.I.G. management. The political fallout will be immense.
This nationalization poses an especially large challenge for John McCain, who is now railing against corporate greed and lack of government regulation of the financial industry. What he doesn't talk much about is how deregulation happened. It was the 1999 Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act and thus eliminated the depression-era walls between between banking, investment, and insurance that made this crisis possible. Glass-Stegall erected walls between banking, investment management, and insurance, so problems in one sector could not spill over into the others, which is precisely what is happening now.
The primary author of the Gramm-Leach-Bliley Act was none other than McCain's economic advisor, former senator Phil Gramm (who thinks the country is in a "mental recession"). McCain fully supported the bill and has a decades-long track record of opposing government regulation of the financial industry. His new-found conversion to being a fan of regulation is going to be a tough sell as Obama is already pointing out that McCain got what he wanted (deregulation) and this is the consequence.
