The New York Times today lets loose with an important editorial demanding that the government tell us exactly who is being bailed out by all the money being pumped into AIG.
What no one is saying — the Bush folks wouldn’t, and the Obama team seems to have taken the same vow of Wall Street omertà — is which firms would be most threatened by an A.I.G. collapse. The Treasury and the Federal Reserve noted in their statement that A.I.G. is a “significant counterparty to a number of major financial institutions.”
That means that by enabling A.I.G. to avert bankruptcy proceedings, the taxpayer is also bailing out — whom exactly?
Not knowing is not acceptable. At this stage of a deepening crisis, no one is arguing that the government should let A.I.G. collapse into a disorderly bankruptcy. It is too interconnected. During the housing bubble, it used unregulated derivatives to insure mortgage securities that turned out to be toxic — without putting aside reserves in case it had to pay up. If it now went under, there could be a chain of catastrophic defaults among banks that hold the securities and related investments.
The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.
Whomever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.
The Times goes on to ask specifically about the role of Goldman Sachs. The theory floated around Wall Street is that Goldman had the largest exposure among Wall Street firms to AIG. Gretchen Morgenson reported that this amounted to $20 billion, although Goldman says it hedged its AIG risks. European banks were huge purchasers of AIG credit default swaps, primarily to get around banking rules in what is called “regulatory arbitrage.”
We’re not the type to reflexively parrot the editorial line of the New York Times. But, frankly, we cannot see why there shouldn’t be complete transparency on this issue. If taxpayer dollars are being used to limit counter-party risk in order to avoid a systemic problem, taxpayers should surely know who these counter-parties are.