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Raymond J. Learsy Headshot

AIG, Toxic Assets and the Call to Personal Sacrifice

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In a far ranging and timely column this week "Obama's Real Test," Tom Friedman cited an extraordinary example of personal engagement and sacrifice responding to the financial disaster facing the nation. While the worthies at AIG were gulping down million dollar plus bonuses, the teachers of Montgomery County Maryland willingly gave up their five percent contracted pay raises, saving $89 million, so that programs and teachers would not have to be terminated in their school district. The salaries they voluntarily cut averaged $67,000 a year, probably not much more than the monthly take of the AIG bonus boys and gals. Other examples of shared sacrifice are proliferating around the country. One further example, the Anderson Ranch in Snowmass, Colorado, a teaching community for the arts has taken a five percent staff pay cut, period.

But if there has ever been an example of "sow and ye shall reap" gone awry it is the madcap stripping of the national treasure by those who have brought us to the edge of the cliff. Little if any personal sacrifice here, let alone consternation at the extent of the damage wrought.

In his op-ed, Friedman makes an interesting point in explaining the workings of the derivative market. He cites the need to cleanse bank balance sheets of their toxic assets so they can return to their function of healthy lending institutions. And here he suggests, certainly with good reason, that the banks are carrying their toxic assets on their books for 85 cents on the dollar, but if forced to sell would have to sell them for less.

And there is the rub, stripping off the scab of probably the greatest outrage of the current financial heist. Those derivatives, the likes of CDS, or better termed "toxic assets" that were carried on the books for 85 cents on the dollar, probably without an AIG bailout, had a value of arguably less than 20 cents on the dollar (Lehman paper was being quoted at about a dime -- I know I am mixing apples and oranges but I'm sure you get the drift).

Certainly if you or I had popped into Goldman Sachs, Morgan Stanley, Bank of America, France's Societe Generale, Germany's Deutsche Bank and offered to buy their AIG derivatives for 85 cents on the dollar before the AIG bailouts, champagne corks would be popping in corner offices from Wall Street to Frankfurt. But hey, why take 85 cents on the dollar on your 20 cent derivatives if you have dumb Joe Taxpayer being steered into your arms at 100 cents on the dollar by their Wall Street cronies in government.

Yes, 20 cents on the dollar might have brought about systemic disaster for the system, but could the same be said for Friedman's suggested 85 cents on the dollar.

And that would have been a haircut comparable to that which was volunteered by the teachers of Montgomery County who had nothing to do with this mess, and whose example should shame the Wall Street Mafia to begin laying off the pressure for more, more and more unrestricted bailout funding without bellying up to the plate and carrying their share.