It is becoming crystal clear that, as Gretchen Morgenstern reports in today’s Times, the AIG bailout is in fact a backdoor bailout of the folks who purchased credit default swaps from AIG. The government has refused to disclose the names of these counterparties, but word is leaking out, and suffice it to say, the list is larded with the usual suspects (e.g., Goldman Sachs, Merrill Lynch, etc.).
There are interesting articles about the AIG bailout in particular, and the resulting counterparty bailout here and here. One very interesting factoid concerns Goldman Sachs. It’s former CEO was at the table when the AIG rescue was hammered out, despite the fact that everyone at the table knew or should have known that Goldman would be one of the primary beneficiaries of the AIG “rescue”
I have been looking for a coherent explanation of why it is necessary for the government to step in and pay full dollar on these instruments, which are referred to as insurance, but appear to have been only a sophisticated form of gambling. On the one hand, we seem to be directly shoring up these institutions, by helping them out from under the bad loans they made. On the other hand we are paying them full dollar on “insurance policies” on those same bad loans. It would be ever so nice if someone could explain why throwing $180 billion dollars at AIG (which then goes to these counterparties) is a more productive use of that money than using it to build infrastructure, or educate kids, or for a thousand other uses. I know that we are constantly told that it would be the end of the civilized world if these gamblers didn’t win all their bets, but I am beginning to suspect that this is a form of socialism we could all do without.
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