Wednesday, March 25, 2009


When the good folks at Enron first cooked up the idea for a cap-and-trade scheme, the appeal was that they could make a fortune running the financial markets to trade the emissions permits and the huge variety of exotic derivatives that would grow up around them.

So it should be no surprise that Wall Street’s foremost wizards jumped on board the effort, including the American International Group Inc. AIG’s then-Chief Executive Martin Sullivan was reported by Reuters as saying in 2007 that AIG “can help shape a broad-based cap-and-trade legislative proposal, bringing to this critical endeavor a unique business perspective on the business opportunities and risks that climate change poses for our industry.” Translation: We’re going to get rich on this.

As if the current bonus scandal isn’t bad enough for a company that lost hundreds of billions of dollars writing credit-default swaps that it had no ability to pay, the great hope of cap-and-trade is that a massive new financial-products bonanza will grow in the carbon markets to replace the one left behind by the housing collapse. Unfortunately, this new market will be an even more perilous bubble than the last one because, although home prices can crash by 50 percent or more, they won’t go to zero. Emissions permits, which derive their value only from the coercive power of government, have an intrinsic value of zero and will, when the inevitable crash comes, converge on that value.

No talk of AIG bailouts is complete without a look also at Goldman Sachs, which reportedly is AIG’s single biggest counterparty for credit default swaps. That means a huge chunk of the endless taxpayer bailouts to AIG are funneled straight through AIG to Goldman Sachs, former employer of erstwhile Treasury Secretary Henry M. Paulson Jr. and the current Treasury Department’s chief of staff, Mark Patterson. Goldman Sachs is perhaps the biggest corporate cheerleader for cap-and-trade, and Mr. Paulson’s first order of business this year was to give a Jan. 12 talk to the environmental group Resources for the Future titled, “How Markets Can Help Address Climate Change and Other Major Environmental Problems” - as if his thoughts on how best to structure markets should carry any kind of weight with the public, given his track record.

Meanwhile, both parties are falling all over themselves trying to be the most anti-AIG, as if they didn’t agree time and again with massive taxpayer bailouts of the ailing insurance giant. The reality is that the bonuses earned by people working at AIG’s real businesses are deserved and should be paid. The toxic financial-products division - little more than a gambling hall that didn’t have the money to pay off the gamblers if they won - needs to be shut down as expeditiously as possible, not kept on life support to funnel billions of taxpayer dollars to big Wall Street (and foreign) banks without transparency or accountability.

Were AIG’s financial-products division allowed to fail, the real businesses could be privatized and left alone to make their own compensation decisions based on market - not political - considerations.

Given the lack of political will for that, we need at least to shine a light on the fact that cap-and-trade represents the worst and most expensive bailout yet, for AIG and all the other Wall Street operators more interested in peddling influence and making money at taxpayer expense than in creating real wealth.

The deputy director of the White House National Economic Council, Jason Furman, told Senate staff this week that the energy tax scheme would actually raise “2 to 3 times” the budget’s official $646 billion revenue estimate. That would mean the actual revenues raised by selling emissions permits would run well into the trillions, roughly between $1.3 trillion and $1.9 trillion between fiscal 2012 and 2019 by Mr. Furman’s estimate.

No wonder AIG, Goldman and others are salivating at the chance to crank up a huge new trading and derivatives business for the secondary markets in permits.

The understandable public anger at AIG needs to be channeled toward stopping the biggest bailout yet contemplated: cap-and-trade.

Phil Kerpen is director of policy for Americans for Prosperity

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