It is not the critic who counts; not the man who
points out how the strong man stumbles, or where the doer of deeds
could have done them better. The credit belongs to the man who is
actually in the arena, whose face is marred by dust and sweat and
blood; who strives valiantly; who errs, who comes short again and
again, because there is no effort without error and shortcoming; but
who does actually strive to do the deeds; who knows great enthusiasms,
the great devotions; who spends himself in a worthy cause; who at
the best knows in the end the triumph of high achievement, and who
at the worst, if he fails, at least fails while daring greatly, so
that his place shall never be with those cold and timid souls who
neither know victory nor defeat.
---Teddy Roosevelt
A post today by John Carney at Clusterstock, and some of the comments to that post, reminded me of my preference to apply "Occam's Razor" to most of life's problems. Simply put (because I'm not bright enough to put it more complexly), Occam's Razor is a principle that states "when you have two competing theories that make exactly the same predictions, the simpler one is the better."
Carney's post discusses statements by the Federal Reserve Bank of New York's general counsel that when the Treasury Department stepped in last year to bail out AIG, the ability of negotiators to make counterparties of AIG (like Goldman Sachs, for instance) on credit default swaps take a "haircut" on what they were owed by AIG went the way of the Dodo bird. A Washington Post article elaborates.
New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government's rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.
"In its negotiations with its counterparties, AIG just didn't have the same bargaining power that it did with the Federal Reserve standing in the background," said Thomas C. Baxter, New York Fed's general counsel. "The only sensible outcome was to give them what they were legally entitled to."
Moreover, AIG's foreign creditors told the Fed that they were barred by their governments from accepting partial reimbursement unless AIG faced bankruptcy, because doing so would amount to giving a gift to a U.S. company, according to officials at the New York Fed. Because the law prohibits the central bank from favoring some banks over others, New York Fed officials said they had determined that all of the creditors, foreign and domestic, had to be paid in full. They also decided it would be improper for the Fed to use its power as the banks' regulator to pressure them into taking less money.
Baxter said that the New York Fed "engaged a couple of institutions as to whether they would contemplate a discussion of taking a couple of points less than what they were entitled to." But he said officials were also racing to prevent AIG's collapse and did not have time to get involved in protracted negotiations with each creditor.
Carney alleges that the Fed's bailout of AIG, rather than allowing AIG to go bankrupt, had the "unintended consequence" of giving the counterparties enough spine that they would settle for nothing less than 100 cents on the dollar, which AIG paid. This, according to Carney, will cost the US taxpayers much more than they would have from the AIG bailout if the US government had simply stepped out of the way and allowed AIG to file bankruptcy or, at the very least, not taken any action to bail out AIG until the crisis reached its eleventh hour, fifty-ninth minute and the screws were put to the counterparties to take less than par.
Some commenters disagree strongly with the underlying contention, arguing that the government bailouts of GM and Chrysler resulted in the government strong-arming secured and senior unsecured creditors to take much less than they'd have been entitled to under bankruptcy, and that the government could have chosen to do so in the case of AIG but chose not to do so for some undisclosed reason. Others argue a more nefarious plot, one in which Hank Paulson and Tim Geithner rewarded their Wall Street cronies with plenty of taxpayer dollars because that's what good old boys do for one another. Another commenter alleges that its premature to raise the issue because AIG might pay back its loans from the Treasury and no taxpayer will suffer a loss on AIG.
I'm not a big believer in the probability that the Treasury Department will get back its full investment in AIG, although I agree that it's too early to tell. On the other hand, I don't buy the theories about the deliberate diversion of taxpayer money into the hands of Wall Street "cronies" of Hank Paulson and Tim Geithner solely because the Wall Street firms are part of some nefarious cabal that involves government and financial "oligarchs." That smacks of a poorly written Robert Ludlum knockoff novel. Human beings simply aren't that smart.
When I look for explanations, I usually look for the simplest one available that still passes the smell test. In this case, it's that the Treasury Department decided that it had to save AIG come hell or high water and the rest of the consequences were "details." Carney's correct to cite the law of unintended consequences. I think these folks were running around like Chicken Little, convinced that the sky was falling and that they were the only ones with the money and the power to prevent it. Having been in the midst of such situations, I suspect that paying off counterparties at par was a "detail" that someone thought about for a minimal period of time, looked at what he or she thought was the "big picture" and overriding goal, and simply said "screw it; pay 'em all at par and let's get this thing done." That was about the depth of the thinking that went into that particular issue at the time.
Of course, that's just my opinion. I could be wrong. Not that being wrong would ever keep me from continuing to lob shells from the peanut gallery.
