Heads on Pikes
I made the point earlier in the month that much of the populist outrage against health care reform is really misdirected anger about the federal bailout of the Banks and AIG. This morning comes proof at how Geithner and Paulson were rolled by Goldman Sachs in the AIG bailout.
Just two days before the New York Fed paid A.I.G.'s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut -- but it never got the chance.UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.
But UBS's good-faith gesture was quickly drowned out by Goldman Sachs and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force A.I.G.'s trading partners to bear losses outside of bankruptcy court.
Heads on Pikes.
For interested wonks, here's the SIGTARP report.
November 17, 2009 11:29 AM | Reply | Permalink
Interesting... this might lead me to doubt my belief that one reason we bailed out AIG was that it was a more politically palatable way to bail out foreign banks.
Though the billions given to Socgen and Deutsche Bank still support that as a possibility.
November 17, 2009 12:30 PM | Reply | Permalink
A happy unintended consequence.
According to the Special Inspector General, Treasury and NYFRB bailed out AIG in September (initial $85 billion) because they feared failure of AIG would 1) lead to a run on money market funds, 2) destroy American's confidence in retirement plans and associated GICs and annuities, and 3) cause some collapse of the financial WAWKI.
GS was right, legally and otherwise, to insist that haircuts were only appropriate in bankruptcy. But having initially bailed out AIG the government couldn't, subsequently, let it go into a bankruptcy. The government was trapped by its earlier improvident action.
November 17, 2009 12:53 PM | Reply | Permalink
But couldn't they have let the structured products division go bankrupt and bail out the rest?
November 17, 2009 4:07 PM | Reply | Permalink
Presumably, whether by way of corporate or contract law, AIGFP's counterparties could reach AIG as AIGFP's surety, guarantor, or cosignatory.
November 17, 2009 7:29 PM | Reply | Permalink
No, not unless AIG signed a written guaranty of performance for its subsidiary. Thet's why you create separate corporations. Counterparties could sue the parent claiming that it had undercapitalized its AIGFP, but good luck with that. That's the kind of lawsuit that costs millions and takes years and that you ultimately settle. That why the Feds should have told them to take a haircut.
November 17, 2009 11:04 PM | Reply | Permalink
I'm afraid a simple "No" isn't sufficient.
To answer the question knowledgeably you'd have to know AIG's corporate structure, its legal obligations for the debts of its children* (subsidiary corporations), and you'd have to know whether the CDSs AIGFP wrote were, in fact, countersigned by AIG or contractually backed up in some other way.
Do you?
* Depending on regulations governing their industry, holding companies differ in their legal obligations for the debts of their children. Parents of insurance companies may have different legal obligations inter sese than the legal obligations of the typical parent-child corporate structure.
November 17, 2009 11:27 PM | Reply | Permalink
Floyd Norris makes an interesting point, namely --
We still don't know which counterparties other than AIG were bailed out.
GS has always said it was hedged (Merrill Lynch, also). In other words it had bought insurance against AIG going bankrupt. Whomever it bought that insurance from was saved from having to pay GS when the USG stepped in and prevented AIG from filing Chapter 11.
Who were those bailed out "insurers"?
November 17, 2009 11:34 PM | Reply | Permalink
Where are the reporters on this one?
November 18, 2009 10:54 AM | Reply | Permalink
Funny thing. In computer science at least (and probably elsewhere) SIG stands for Special Interest Group.
Hummmmmm.......
C
November 17, 2009 1:07 PM | Reply | Permalink
Apropos of almost nothing, there's this:
November 17, 2009 3:41 PM | Reply | Permalink
No ticky....no washy.
C
November 17, 2009 3:59 PM | Reply | Permalink
Its not just the incompotent Banks and AIG bailout. Don't forget the incompotent operation of the post office losing money on a monopoly! Then there is Medicare that even Obama says is burning money on an unsustainable basis. Then there is the Stumulus that Obama said we just absolutely, positively had to pass right away to keep unemployment below 8% that is now over 10%. Then there is the healthcare bill that will RAISE health care costs.
Its the incompotence.
November 17, 2009 8:03 PM | Reply | Permalink