Maybe NY Fed Wasn't Evil with AIG, Just Really Stupid

Friday, October 30, 2009 , , , , , , 1 Comments

I have nightmares about this kind of shit
who the hell is that guy in the back sneaking away??

Bank Lawyer's Blog does Unintended Consequences And Potshots From The Peanut Gallery and basically implies that there was nothing sinister about AIG. I could read between the lines a bit deeper and infer that he is also saying no one actually thought about the consequences of what they were doing at the time within the NY Fed but I can't read lawyers.

Can someone translate?

I hate peanuts, I prefer throwing F bombs, jabs via Google, vicious tweets, and protests (in no particular order) but that's just me. I get BLB's point, even if he is a lawyer:

A post today by John Carney at Clusterstock, and some of the comments to that post, reminded me of my preference to apply "Occam's Razor" to most of life's problems. Simply put (because I'm not bright enough to put it more complexly), Occam's Razor is a principle that states "when you have two competing theories that make exactly the same predictions, the simpler one is the better."

Carney's post discusses statements by the Federal Reserve Bank of New York's general counsel that when the Treasury Department stepped in last year to bail out AIG, the ability of negotiators to make counterparties of AIG (like Goldman Sachs, for instance) on credit default swaps take a "haircut" on what they were owed by AIG went the way of the Dodo bird. A Washington Post article elaborates.

New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government's rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.

"In its negotiations with its counterparties, AIG just didn't have the same bargaining power that it did with the Federal Reserve standing in the background," said Thomas C. Baxter, New York Fed's general counsel. "The only sensible outcome was to give them what they were legally entitled to."

Carney alleges that the Fed's bailout of AIG, rather than allowing AIG to go bankrupt, had the "unintended consequence" of giving the counterparties enough spine that they would settle for nothing less than 100 cents on the dollar, which AIG paid. This, according to Carney, will cost the US taxpayers much more than they would have from the AIG bailout if the US government had simply stepped out of the way and allowed AIG to file bankruptcy or, at the very least, not taken any action to bail out AIG until the crisis reached its eleventh hour, fifty-ninth minute and the screws were put to the counterparties to take less than par.

Some commenters disagree strongly with the underlying contention, arguing that the government bailouts of GM and Chrysler resulted in the government strong-arming secured and senior unsecured creditors to take much less than they'd have been entitled to under bankruptcy, and that the government could have chosen to do so in the case of AIG but chose not to do so for some undisclosed reason. Others argue a more nefarious plot, one in which Hank Paulson and Tim Geithner rewarded their Wall Street cronies with plenty of taxpayer dollars because that's what good old boys do for one another. Another commenter alleges that its premature to raise the issue because AIG might pay back its loans from the Treasury and no taxpayer will suffer a loss on AIG.

I'll take nefarious plot for $1,000, Alex.

Advanced players might choose "What Didn't Happen"

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Kevin said...

I love it when you "read between the lines." You read correctly.