How Pakistan Is Like AIG


By Joe Campbell
May 12th, 2009

[digg-reddit-me] http://tenacitytenfold.com/?author=4 nex·us n.pl. nexus or -us·es.

  1. A means of connection; a link or tie: “this nexus between New York’s . . . real-estate investors and its . . . politicians” (Wall Street Journal).
  2. A connected series or group.
  3. The core or center: “The real nexus of the money culture [was] Wall Street” (Bill Barol).

[Latin, from past participle of nectere, to bind.]

This Sunday, America witnessed Pakistani President Zardari’s disgraceful performance on Meet the Press. He pandered; he obfuscated; he shirked any responsibility or blame; he turned briefly eloquent – and then outrageously self-righteous. It was clear that he is not one tenth the politician his wife was – and it seems not one tenth the leader. She may have been corrupt (as it seems was he) – but he appears to lack her communicative gifts or her aptitude for politics. On top of it, his management style seems be Bush-level incompetence. The most ridiculous point Zardari tried was to invoke AIG’s bailout as an argument to give more money to Pakistan.

David Gregory – to his credit – asks the tough question – the question that needs to be asked of Pakistan’s leader (especially given stories like this) although Gregory does manage to shift responsibility for the criticism of Zardari off to another reporter:

The question a lot of people ask is are you – is Pakistan really committed to that war?  In The New York Times Dexter Filkins, who, who’s reported from Afghanistan and Pakistan, writes this:  “Whose side is Pakistan really on?  …  Little in Pakistan is what it appears.  For years, the survival of Pakistan’s military and civilian leaders has depended on a double game:  assuring the United States that they were vigorously repressing Islamic militants–and in some cases actually doing so–while simultaneously tolerating and assisting the same militants.  From the anti-Soviet fighters of the 1980s and the Taliban of the 1990s to the homegrown militants of today, Pakistan’s leaders have been both public enemies and private friends.  When the game works, it reaps great rewards:  billions in aid to boost the Pakistani economy and military and Islamist proxies to extend the government’s reach into Afghanistan and India.”

Zardari’s responded:

[W]hat billions are you talking about?  Like I said, a billion dollar a year?  That’s not even – altogether, this aid package is not even one tenth of what you gave AIG.  So let’s face it; we need, in fact, much more help.

This isn’t the first time Zardari has found it prudent to invoke AIG to justify giving more billions to Pakistan – he apparently disconcerted lawmakers a few days earlier this week – as the New York Times reported:

[W]hen he asked for financial assistance, he likened it to the government’s bailout of the troubled insurance giant, American International Group.

While it is probably true that Zardari needs more funds – his pique at being asked to justify these funds is galling – especially when so much of it was apparently spent preparing Pakistan’s military to fight India instead of the Taliban. Though this analogy is politically stupid – it does bring up an interesting parallel.

AIG has been the nexus of the financial crisis in much the same way that Pakistan is the center of the threat of strategic terrorism. 

When synthetic CDOs were invented, they were structured in such a way as to create positions that were safer than AAA-rated debt. (An explanation of what this means here.) These positions were called super-senior. Yet the ever “cautious” bankers decided to hedge against even these supposedly risk-free positions – allowing them to free up more capital, so that for the purposes of regulation, it was treated as if they had not lent out any money at all. They decided to buy insurance, calling this insurance a credit default swap, hedging against the risk that even this super-safe investment would go bad. There was one big player in this, one firm that provided so much of this insurance which led to this boom in lending and enormous leveraged positions – AIG – who insured these super-safe debts with nary a plan to deal with defaults. After all – these debts were super-senior – there would only be defaults if historically unprecedented numbers of these mortgages went south. (Precedent only went back forty years or so with modern macroeconomic record-keeping.) AIG Financial – a small part of the AIG empire which spanned insurance across dozens of industries around the world – decided to leverage the entire company to insure these products – leading to enormous profits in the short-term – and systematic risk as soon as things went bad. If AIG had not been able to pay on its insurance to the big banks, things would likely have been worse.

Pakistan meanwhile is the land of Dick Cheney’s nightmares, where WMDs, nuclear weapons, terrorists, and a teetering state all exist. Pakistan combines all of the elements national security experts fear could have disasterous consequences if they come together. As Barton Gellman describes Pakistan’s importance in his excellent biography of Dick Cheney:

The nexus, if it was anywhere, was in Pakistan – a nuclear state whose national hero sold parts to the highest bidder, whose intelligence service backed the Taliban, and whose North-West Frontier Province became a refugre for al Qaeda.

What it comes down to is that both are too big – and too connected – to fail. Both have had billions of American dollars pumped into them to prop them up. Both have prompted outrage as they have seemed to use this money to benefit themselves and not for the purposes it was intended. Both are controlled by leaders whose hands were far from clean in creating the current crisis. Neither the leadership of Pakistan nor the leadership of AIG have taken responsibility for the crisis that occurred oin their watch – in their realm of control – blaming America and the world at large for their problems instead.  Perhaps because of this, the leadership of both seem to believe that they deserve to be rewarded for their efforts rather than held accountable for their significant failures. Yet even so, the costs of the failure of either is likely catastrophic.

Maybe this is the point Zardari was trying to make – his way of taunting us with the fact that he knows we cannot allow him to fail – just like AIG.

[Image by cogito ergo imago licensed under Creative Commons.]

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