We suspect the reason the public and politicians are outraged about the AIG bonuses rather than the larger structure of the AIG bailout is because the concepts are just easier. We understand what it means to pay millions to folks who lost billions. We’re not sure what all this talk about counterparties and systemic risk is about.
Former NY State governor and attorney general Eliot Spitzer urges us to turn from this simple scandal to “the real disgrace at the insurance giant,” the fact that AIG’s counterparties are getting paid in full.
Why aren’t AIG’s counterparties taking haircuts on their exposure? Here’s Spitzer’s answer:
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
Someday this is all going to confuse students of history. The business columnist of the New York Times agues for huge payments to executives and the sanctity of contracts, while Clusterstock and Eliot Spitzer find themselves on the same side arguing against the bonuses. We truly stepped through the looking glass once we became Bailout Nation.