TARP Special Inspector General Neil Barofsky opines that the NY Fed could have done a better job in extracting concessions from AIG's credit default swap counterparties. I say, rubbish. This memo from the Department of 20/20 Hindsight is interesting, but until we get the supporting memo from the Department of Unintended Consequences we have nothing.
The Economist of Contempt (who is actually a lawyer, but nevermind) explains the absurdly weak negotiating position of the Fed, which had already committed itself to avoiding the global grab for assets that would have followed an AIG bankruptcy filing.
Felix Salmon thinks there was something fishy about Goldman's role in all this so he beats the populist drum, but without conviction:
But I’m maybe slightly more sympathetic to the Fed than most — or at least I understand how this happened. It shouldn’t have happened, that’s true: for the sake of putting a knife into the moral-hazard trade, some haircut — any haircut — should definitely have been imposed, even if it was only the 2% that UBS offered to accept.
But the government owned AIG, which created the situation that Germans call Anstaltslast: the fact that state-owned companies simply don’t default on their obligations. The government was also battling a major crisis using the only weapon at its disposal: enormous amounts of liquidity. When you’re putting out a fire, you don’t stop to worry that large amounts of liquidity are going to end up where you don’t particularly want them — the important thing is putting out the fire.
Well, yes. A $2 haircut on the $62 billion under discussion would have saved the taxpayer about $1.2 billion - not nothing, but not consequential in terms of the Fed's trillion dollar balance sheet.
As to the moral hazard argument - please. The moral hazard hawks had been given their day when Lehman was allowed to fail. The consequences were not just ghastly but ghastly in a way that should have been easily predicted, which is to say, they were more or less unpredictable (who knew a money market fund would break the buck and crash out the commercial paper market?). The idea that the Fed should have reprised that experiment in November in order to rally up a billion dollars (cue the Dr. Evil laugh) is daft.
Mr. Salmon's includes this:
No - TED has an utterly implausible, self-contradictory (but colorful!) explanation of how those negotiations could have proceeded. First, the Fed negotiator engages in insane posturing and bluster:
And let me tell you something, gentlemen, banker to banker: you do not want to be on that list. That list will be a world of pain. That list will be Death. That list will be populated with people and institutions which will have the full weight, power, and authority of the government of the United States of America brought down on them in the most thorough, comprehensive, and legal way you could possibly imagine. That list will be the proctology exam from Hell, and it will never end.
Yeah, yeah. And on to the contradiction:
You've gotta drop a daisy cutter on their ass, and roll the tanks in immediately thereafter. Shock and awe, baby.
Well, which is it? If these banks have such formidable lobbying power (Likely!), then how can the threat of a lifetime on "The List" be credible? Is Goldman cowering as a pariah today? Please.
As to the basic premise (of an earlier post, anyway) that the Fed should threaten to burn down the entire financial system if their demands are not met, well, it does suggest a business model for cash-strapped municipalities: have their fire departments negotiate fee-for-service deals while standing on the doorsteps of burning buildings. That could work. It's not what people expect, but it could work.
It is up to the Fed to promote stability, not Goldman Sachs. Sorry.
STRAY ASIDE: I love the overlap between people who want to extend Khalid Sheik Mohammed every protection of criminal law but want to put all of contract law in the shredder in order to to get Goldman Sachs. Keep the focus on evil!