Tuesday, April 21, 2009

Easterbrook on the AIG Fiasco

It's not often you get the clearest financial writing from a football column, but Greg Easterbrook segues into the AIG fiasco in Tuesday Morning Quarterback today. (The link is for the entire column, scroll down to the sub headline: Regrettably, TMQ was Right About Something to find the entire AIG commentary.)
On the big outrage, of the $172 billion taxpayer-funded giveaway, we now know much of it used to cover credit-default swap debts AIG refused to honor. Large amounts went to foreign banks, such as Deutsche Bank and Societe Generale of France. AIG simply handed over payment in full, without negotiating. When AIG was days from insolvency, it should have said to Deutsche Bank and others, "If we go bankrupt, you will stand in line with all the other creditors at the bankruptcy court and be lucky to get 10 cents on the dollar. Would you accept 50 cents on the dollar to settle instead?" Negotiating with creditors to avert bankruptcy is a standard business tactic; General Motors and Chrysler have been doing this for the past few months. As the Wall Street Journal recently reported, a year ago Merrill Lynch was owed credit-default swap payments by an insurer called XL Capital, and after negotiations, Merrill accepted 13 cents on the dollar.

But instead of negotiating a reduction of debt, AIG simply immediately handed over full value. After all, the money was coming from taxpayers' pockets, and when has anyone cared how much taxpayer money is wasted? Goldman Sachs was the largest single recipient of AIG's paid-in-full taxpayer-funded gift, receiving $13 billion. Merry Christmas! And now we learn that [CEO Edward] Liddy owns at least $3 million worth of Goldman Sachs stock -- whose price was shored up by the paid-in-full taxpayer gift. AIG's tax-funded gift to Goldman Sachs couldn't possibly have had anything to do with Liddy's stock, could it? The worst sin is that the Washington muckety-mucks running the tax-money giveaway team did not require AIG to negotiate down its counter-party obligations. Bernanke and Henry Paulson, who approved AIG's actions last fall, deserve to be run out of town on a rail for their irresponsibility in management of public funds. Meanwhile, can anyone imagine that if a French or Germany insurer owed money to an American bank, that the French or German governments would ever pay one single centime or pfennig, let alone cover the entire debt immediately?

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