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Obama and Hu in Beijing: Pledges of cooperation but few concrete agreements Jason Reed/Reuters

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One Messy Bailout

Neil Barofsky pulled no punches in his Nov. 17 report about the bailout of AIG, and those emerging with a black eye include every major Wall Street bank and the current Treasury Secretary. Barofsky, Special Inspector General for the Trouble Asset Relief Program, focused on the second phase of the rescue of the floundering insurer: the nearly $30 billion payment to institutions that had entered into credit-default swaps with AIG. The report says the bailout by the New York Fed, which was then led by Timothy Geithner, was poorly handled from the start. First, when a private-sector bailout plan fell through, the Fed had no backup position and quickly lent AIG $85 billion on terms that proved unsustainable. Next the Fed botched negotiations over the $30 billion payout by treating the counterparties—such companies as Deutsche Bank (DB), Goldman Sachs (GS), and Merrill Lynch (BAC)—with kid gloves and bending over backwards to keep their identities secret. Barofsky also lays out in painful detail the unwillingness of any counterparty except UBS to accept one penny less than top dollar.

—Edited by Harry Maurer & Cristina Linblad

Is It Time to Do Away with America's 'Debt Bias'?

Imagine if your spouse lectured you on the evils of junk food but then offered to subsidize your Twinkie habit. Well, that's pretty much how it is with Americans and the government, argues the New Yorker's financial columnist, James Surowiecki, in the Nov. 23 issue. The U.S. tax code allows individuals to claim deductions on mortgage interest, up to $1 million, while corporations can write off all the interest on their debt. As a result, the economy suffers from what dismal scientists call a "debt bias." The tax break encourages homebuyers to make smaller downpayments and take out bigger mortgages. It also inflates housing prices, studies have shown. Similarly, the break makes it up to 42% cheaper for companies to take out debt than to issue equity, estimates the National Economic Council. While the tax system alone can't be blamed for the current slump, a recent IMF study found that tax distortions likely led American households and companies to take on much more debt than they would have otherwise.

Surowiecki suggests the crisis should prompt Washington to rewrite the tax code. That won't be easy: In 2005 a Presidential panel on tax reform proposed doing away with the business-interest deduction and ratcheting down mortgage-interest tax breaks—but Congress studiously ignored the suggestions. Other countries, however, have shown it can be done. Britain scrapped its mortgage tax break in 2000, while Germany and Denmark last year pared back deductions on business-loan interest. (The New Yorker, "The Debt Economy")

—Edited by Harry Maurer & Cristina Linblad

Trump Still Holds Cards

The Donald is back at the table—sort of. After seeing his New Jersey casino empire slide into bankruptcy for the third time, real estate baron Donald Trump on Nov. 17 folded his bid to regain control but didn't give up his seat. As part of a deal with bondholders, Trump will get a 10% stake in a recapitalized Trump Entertainment Resorts, which owns three Atlantic City casinos. In exchange, Trump and his daughter Ivanka agreed to drop claims against the company. Trump will be free to use his name on other gambling ventures but not in five neighboring states. He and Ivanka quit the board in February.

—Edited by Harry Maurer & Cristina Linblad

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