We’ve already had these two posts on the AIG outrage and the ridiculousness of the Congress’ response. What I think is more ridiculous, is how people are getting caught up in less than $200 million, some of which was probably earned, instead of focusing on the bigger issue…
AIG disclosed that it paid $105 BILLION (that’s right, billion not million) of government funds to cover collateral payments, meet lending obligations, and settle derivative contracts with investment banks. These obligations were met in full without any counterparty having to take 1 penny of a haircut. Goldman Sachs got the largest payment, $12.9 billion. This is the problem with government bailouts. Had AIG been allowed to fail, all these investment banks would have had to take a haircut on their transactions with AIG. Rather than keeping AIG out of bankruptcy, the government should have let it collapse and then stepped in with a stronger negotiating hand and covered some of the counterparty risk these investment banks had with AIG in order to ensure the whole system didn’t collapse. Having taken over the firm before bankruptcy, the government cannot void contracts. So we have all these banks getting paid to the penny and all the executives getting paid in full for their bonuses. I’m not a contract lawyer, but I assume those contracts would be void by the bankruptcy of the institution. Thus, the government could have forced the banks and executives to renegotiate their payments, thereby saving the taxpayer money.
Where is the public on the $105 billion? We are all too focused on hating the wealthy executives who are getting paid less than $200 million. We all just got taken by the media, Congress, and the President.
Last 3 posts by Jason
- Reply To All - March 16th, 2010
- You Can't Make This Stuff Up - February 19th, 2010
- Washington Gridlock - February 11th, 2010
That’s a really good point. The cost would have been so much less. The $200 million bonuses are easy for the media and the general public to understand since most people earn a wage. Not many people are involved in huge insurance contracts with banks. I think Congress and the president knew they messed up and wanted to lay the blame on someone else. AIG was an easy target.
Couldn’t agree more Jason. The bonuses paid (although now it looks like it was closer to $235M, instead of the $165M AIG told everyone) are less than 0.1% of the amounts they used to settle their contract obligations.
No wonder that Goldman and other recipients of TARP funds say they may be in a position to pay back the Treasury…the were double collateralized, first by the Treasury, then by AIG!
This highlights the problem of removing the “failure consequence.” When the government chooses winners whose only option is success, all rationality goes out the window. Since it appears, Bernanke and Geinther are requesting additional authority to seize banks now, it seems this problem will just become bigger.