Other People’s Tax Money

American taxpayer money will help Deutsche Bank bail out collapsing insurance giant AIG. Is this a scandal?

Josef Ackermann, CEO of Deutsche Bank, never misses an opportunity to proudly announce that his bank is the only large German bank to go through the financial crisis without (German) government help. The fact that it has received some $11.8 billion in American money through bailouts for U.S. insurance giant AIG, however, is something he isn’t exactly shouting from the rooftops.

Because of pressure brought by American taxpayers who have already supported AIG to the tune of some $180 billion, the global insurance giant now has to reveal where all the money went. About $100 billion went to domestic and foreign customers. Along with Deutsche Bank, other banks like Goldman Sachs and Société Générale who were said to be weathering the crisis quite well also got more than $11 billion in aid to AIG.

Is this a scandal? No. The figures show two things: there are no large banks anywhere in the world that don’t profit directly or indirectly from government aid. In all probability, the entire global banking system would have disappeared if governments had not massively intervened. Secondly, however, this is precisely the reason why financial concerns like AIG and, here in Germany, Hypo Real Estate had to be rescued. Their customers would have sustained such massive losses without government aid that innumerable other financial institutions would have toppled like dominoes had AIG gone bankrupt.

The AIG money is thus beneficial to bank customers and taxpayers all over the world. Deutsche Bank and others insured themselves extensively against loan defaults by way of so-called credit default swaps. Many of these loans are now in default and AIG has to pay up. Because the company didn’t take into account the possibility that so many customers would actually have to use the insurance, AIG didn’t set aside nearly enough funds to make good on the claims – and that’s the real scandal.

It’s a bitter pill for American taxpayers to have to swallow that they’re now insurers of the global finance system and are on the hook for these claims, but there is no alternative. Ackermann and others who have profited from American federal insurance should be thankful that the U.S. government has ensured their survival.