Yeah, I agree that was pretty accusatory. But the rear view mirror gives us some spectacular hints.
The AIG bailout, all $165-170 billion worth of it, took place during the W administration. Its architect was probably Paulson more than anyone else.
My beef with the way it was done is that no one took the time to challenge the validity of the need for the cash to the extent it involved CDS obligations which neither AIG nor the government were fighting as uncollectible.
AIG and the government simply rolled over. Cash was infused into AIG (which is now in Goldman's and Deutsche Bank's and others' coffers) to pay off on obligations whose validity is supremely suspect.
Was it bad judgment or done by connivance?
I have a great deal of difficulty believing that no one knew that the obligations were subject to challenge. After all, some of the most allegedly brilliant legal minds worked on the issue. In my view, the use of such exorbitant amounts of taxpayer money required a concerted legal attack on the validity of the instruments on which payments were made. Instead, the bailouts were done speedily and without much thought to the consequences.
Bad judgment? I doubt it. Everyone involved probably knew that the derivatives could be subjected to a substantial challenge. The unanswered question, absent bad judgment, is why weren't they challenged? Why weren't suits filed in states where there are friendly commissioners of insurance to have these derivatives declared the illegal issuance of insurance?
I don't know the precise answer to this question. I do know, however, that the question itself is not being asked and that it is an important one. I think that the basis for a huge scandal may very well exist because if it turns out that much of the cash used was wasted on paying off an uncollectible debt, then the whole basis of these derivatives being a potential systemic threat to the economy disappears or is subtantially minimized.
In other words, if 80% of the CDS notional value of $20-30 trillion is not collectible, then the systemic threat may have been a lot less and the amount of the bailouts may have been substantially reduced.
Congress and the president were, however, buffaloed into acting quickly and rapidly because the sky was falling down and we were risking death and destruction if the bailouts didn't take place. No one bothered to reflect or challenge the prevailing mind set. |
