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Annals of Crony Capitalism: Revisiting the AIG Bailout

Cronyism may well be an intensifying problem in contemporary American capitalism, but an incorrect identification and labeling of crony capitalism subverts meaningful reform. Five years after considerable financial assistance was provided to the American International Group by the New York Federal Reserve Bank and the U.S. Treasury, the AIG bailout story remains highly controversial as a putative case of capitalism gone bad — crony capitalism at its worst. This paper reviews the record surrounding the AIG bankruptcy and argues that the bailout decision and the subsequent structure of the bailout tell a much different story than the one characterized as “crony capitalism.” Based on a close reading of this record, the story I tell is that the lingering controversies over the bailout are not a result of the corrupt behavior of Federal Reserve and Treasury officials. Rather, they are the result of impromptu and highly improvised risk management by government officials who had no clear regulatory authority over failing investment banks and insurance companies — like Bear Stearns, Lehman Brothers, and AIG — and who were conditioned by their professional training and current responsibilities to focus on the worst-case scenarios following the collapse of large financial institutions holding fast-depreciating real estate assets. Operating under severe time constraints and existential anxiety, mistakes and missteps were made by the New York Fed in its unfamiliar role as the chief restructuring officer of AIG. But this is far different story than calculated corruption benefiting large domestic and foreign banks vulnerable to an AIG collapse. This essay is a cautionary tale about exaggerated (and false) claims of institutional corruption in the public and private sectors. We are currently witnessing a sufficient number of cases of both unlawful and lawful-but-corrupt behavior to motivate a debate about meaningful reforms. Inaccurate characterizations of institutional and individual behavior can only serve to contaminate this important conversation.