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Why not rescue only the counterparties?


Charlie Rose interviews the big few on the AIG bailout. What’s very interesting is this question by Gretchen Morgenson:

..the question, which is if in fact [AIG going bust] was systemic risk, if in fact Goldman Sachs was going to, you know, fail or somebody else was going to fail
because of this, let’s take a look at this list of counterparties and
decide who, in fact, does need to be bailed out because of systemic risk,
and who does not and who could take a haircut
and who could say, OK, I will
pay, you know, the government could negotiate tough across the table and
say, you are not in any risk of failure, you are going to take — you are
going to pay 75 — I am going to pay you 75 cents on the dollar, instead of
100 cents on the dollar.

There did not appear to be any thought to how to make this the best
possible deal for the taxpayer. It was all just hurry up, we have got to
do this, it’s a problem, it’s a problem, and now we are paying the

We’ve all been told that AIG going down is a big risk. Very big risk. The mother kahoona of all risks. The risk that will destroy the very fabric of civilization as we know it, worse than 3,000 nuclear bombs, or 600 meteors hitting Manhattan at the same time, and definitely worse than global warming.

But how f-ing bad, darn it?

I want to call this bluff. They tell us, look, see what happened after Lehman. What happened, really? Some stocks went down. Some banks went and got capital. AIG should have gone bust, but they weren’t allowed to. Citi had other problems. Goldman Sachs neatly swiped off $12 billion of the AIG bailout, as did Deutsche Bank and Merrill/BoA.

In general, everyone survived. Maybe if we let AIG go down, they will survive – and if they can’t, the US government can figure out if saving anyone is of any real use (not to save THEIR counterparties, but to see if putting capital will provide any return to the taxpayer) and then consider putting capital in. Surely, people like Buffett will identify the best survivors and put capital there; and the rest may not even need to be saved.

I know this is way early; and also way too easy for me to say, sitting where I am. But this is my rant for the day, and I need to figure out how “systemic” this “risk” really “is”. I’m already scared of words in quotes.


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