Comments on: The Fed offers banks an outrageous subsidy via AIG

By: Geithner’s dubious AIG cover up « naked capitalism

Geithner’s dubious AIG cover up « naked capitalism — Thu, 07 Jan 2010 14:31:40 +0000

[...] less on the free market, exposing them to tens of billions in losses instead of taxpayers (see CW story from March 2009 on this issue). So, in a very real sense, many believe taxpayers were defrauded by the [...]

By: Geithner urged AIG to withhold information - Credit Writedowns

Geithner urged AIG to withhold information - Credit Writedowns — Thu, 07 Jan 2010 14:00:27 +0000

By: PIMCO: “Stay under the umbrella” - Credit Writedowns

PIMCO: “Stay under the umbrella” - Credit Writedowns — Sat, 09 May 2009 01:41:53 +0000

[...] Home » Archives » Markets » PIMCO: “Stay under the umbrella”« The Fed offers banks an outrageous subsidy via AIG « » Google search guru Marissa Mayer on Charlie Rose [...]

By: Edward Harrison

Edward Harrison — Sat, 07 Mar 2009 18:56:51 +0000

MG,
Your argument has validity. However, I take a more cynical view given the lack of transparency. If a financial institution like AIG is nationalized, taxpayers deserve the right to know how their monies are being used. To the degree this does not happen, as it certainly has not with AIG, we should suspect nefarious reasons.

I don’t buy it for one second that Don Kohn and company are withholding names to protect the collective interests of the banking system and its stability. What is happening is that the Federal Reserve is acting in concert with specific institutions in a way that calls the Fed’s independence from the industry into question. Were these machinations done in the full light of day, the uproar would have been immense.

In my view, a more free market approach would have been an Austrian solution, whereby we allow a portion of the shadow banking system to disappear if they cannot fulfil their contractual agreements. As you say, a contract is a contract.

By: M.G. in Progress

M.G. in Progress — Sat, 07 Mar 2009 18:45:44 +0000

To see an element of subsidy we have to see those contracts. If there was a compelling case and need to unwind them a premium over short term value could be justified if taking them to term or maturity could have had worst consequences on some balance sheets. It is for instance to be noted that Deutsche Bank reduced it’s leverage ratio considerably over the period in question. Have they claimed on some insurance contracts taken out with AIG? In any case one could still assume that unwinding those contracts “was very much in the interests of the U.S. to pay for the rescue of AIG”. If there is in the interest of the nation…you pay a premium as short term perspectives could be better than long term, particularly if you are trying to avoid bankruptcy in the long term.

By: Edward Harrison

Edward Harrison — Sat, 07 Mar 2009 14:05:15 +0000

M.G.,

It is not at all about honouring contracts. I too believe one must do so. In this case, it is a question of price. Clearly, the Federal government cancelled these contracts at prices which were very advantageous to AIG’s counterparties.

{The Fed decided to unwind] some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

It is essentially a subsidy to those firms.

By: M.G. in Progress

M.G. in Progress — Sat, 07 Mar 2009 09:48:06 +0000

There is a compelling case for the Euthanasia of the banking system at http://mgiannini.blogspot.com/2009/03/euthanasia-of-banking-system.html.
I still contend that in the insurance business the first thing one should consider is to honor a contract. We can certainly say that AIG and its counterparts either European or Goldman Sachs had really bad assets and liabilities management (for instance by all concentrating their insurance contracts or CDS, at one insurer sic!), but can we say that AIG must not honour the financial commitments it has made through these insurance contracts, no matter the reason why they were taken out?
It’s like saying that tomorrow the United States of America are simply defaulting on its Treasuries… Can you imagine that? The people who lose biggest out of the collapse of AIG are probably the European banks but from a certain perspective, it is very much in the interests of the U.S. to pay for the rescue of AIG.