If Spitzer hadn't destroyed his career, would taxpayers be paying trillions in bailouts?

Like many powerful men before him, former New York Attorney General and Governor Eliot Spitzer made an insanely stupid career-ending and family-damaging mistake. But there are many reasons to suspect he was caught and prosecuted for political reasons. Specifically, it’s easy to suspect he was outed for being knowledgeable and outspoken regarding white-collar crime just as the financial crisis was exploding. Spitzer was outed soon after publishing an outstanding op-ed in The Washington Post titled “Predatory Lenders' Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers”.

With that context, it’s hard not to wonder how the political response to the financial crisis might have evolved differently had Spitzer not destroyed his career (possibly with the help of Patriot Act-enabled domestic spying). Spitzer just published a letter asking a key question:

Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

…It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Posted by James on Tuesday, March 17, 2009