Network News

X My Profile
View More Activity

Should the government be running AIG today?

Looking back, Felix Salmon thinks the government should have nationalized AIG:

The dispute between Goldman and AIG was one over collateral. Goldman wanted AIG to put up ever-increasing amounts of collateral against the [credit defaults swaps] which it had written — demands for cash which AIG was unable to meet. So the government stepped in and unwound the contracts near the bottom of the market, paying out Goldman Sachs and other AIG counterparties in full, and locking in massive losses for the insurer.

The alternative would have been to nationalize AIG outright, and imbue it with the government’s own triple-A credit rating. Since many of the largest collateral calls were a function of AIG’s own deteriorating credit rating, that alone would have helped to minimize the amount of cash needed to be put up as collateral. AIG, rather than unwinding all those CDSs, could then simply have held onto them, putting up as much collateral as it needed to, and paying out on them as and when the underlying bonds defaulted. The end result would, with hindsight, have been significantly cheaper for both AIG and US taxpayers.

Now it is true that as part of the AIG bailout, the New York Fed took possession of a lot of CDOs, putting them in portfolios with names like Maiden Lane III, and hiring Blackrock to manage them. As the value of those CDOs has risen, the US government has seen mark-to-market gains on its portfolio. But that doesn’t change the fact that Goldman Sachs bought credit insurance very cheap from AIG, and then sold it back at a very high price to the US government, locking in billions of dollars in trading gains. AIG took equal and opposite losses on those transactions, and ended up passing those losses on to the US taxpayer.

Anyway, hindsight is 20/20, and I'm sympathetic to why the federal government took the strategy with the lowest downside risk at a moment when no one knew what was happening. Not nationalizing AIG in 2008 and wishing we did in 2010 is a lot better than nationalizing AIG in 2008 and wishing we didn't three days later.

That said, there is the problem of precedent. As far as I can tell, Citibank's new proposal to sell insurance in the event of a financial crisis is an effort to fill the role that AIG was filling before it fell. That's scary.

By Ezra Klein  |  February 9, 2010; 8:09 AM ET
Categories:  Financial Crisis  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Let's make a deal
Next: Don't confuse a plan that will score with a plan that will work

Comments

"Not nationalizing AIG in 2008 and wishing we did in 2010 is a lot better than nationalizing AIG in 2008 and wishing we didn't three days later."

Ezra, would you please elaborate on the "nationalization remorse" that you're alluding to here? We already had a huge capital position in AIG. Nationalization would only have meant assuming a significant management role. What's the downside?

Posted by: mike_griffin | February 9, 2010 9:16 AM | Report abuse

Paulson and Geithner bailed out their buddies thru the back door. They scamed us big time and should be tossed in jail!

Posted by: obrier2 | February 9, 2010 9:26 AM | Report abuse

Scarey indeed that Citibank is proposing to sell insurance in the event of a financial crisis. It's time that Congress takes a long look at these practices and passes legislation which will protect the American public from the risky practices of the banking industry. What are they waiting for?

Posted by: OhMy | February 9, 2010 9:46 AM | Report abuse

Nationalizing AIG could have negative political implications. Republicans are blaming the failures of GM and GMAC on Obama, and doing so with some success. In an objective sense, such assertions may not be credible, but they can be successfully made because of quasi-nationalized state of Chrysler, GM and GMAC. Nationalizing AIG would not have been a panacea, and there would have continued to be problems and issues, and then Obama would have had 100% ownership of them, in addition to propping up less-than-flattering comparisons to Hugo Chavez and Fidel Castro.

Among other problems.

Posted by: Kevin_Willis | February 9, 2010 9:49 AM | Report abuse

I'd buy Ezra's "don't be a Monday morning quarterback" schpiel if it wasn't for all the other evidence that the Fed bailout of AIG was either a crooked or an incompetent deal.

First, since the bailout the Fed hasn't called for eliminating or regulating these types of dangerous, destabilizing and abusive derivatives. It's all business as usual, we did what we had to, don't worry about the future.

Second, the Fed did everything it could to keep this deal secretive. At one point they were advising AIG not to make required reports to the SEC. They even went so far as to invoke national security concerns (seriously). Why would they do that if the deal wasn't either crooked or incredibly incompetent?

Posted by: alex50 | February 9, 2010 9:53 AM | Report abuse

I wonder how much of the problem with any nationalization scheme is that it would involve dozens of Treasury officials working around the clock and a lot of posts in Treasury have been blocked by Republican holds.

Posted by: randrewm | February 9, 2010 1:00 PM | Report abuse

The 'too big to fail' argument has got to go. Smaller entities that were in much better financial health (and better managed) than the giants would have been capable of 'picking up the pieces' if we had let the the 'favored few' fall. It appears that many of today's leaders missed biology class the day they talked about the 'survival of the fittest.' Society has forgotten that there is 'natural law' and it will eventually prevail despite the efforts of a few to defy it.

Posted by: Thenviron | February 9, 2010 2:21 PM | Report abuse

"The alternative would have been to nationalize AIG outright, and imbue it with the government’s own triple-A credit rating."

Excuse me? The only other alternative? I don't think so. Not a dime of taxpayer money should have been placed into AIG. To the extent that any of the AIG creditors might have been, by objective and rational standards, worthy of receiving bailout funds, they should have been bailed out openly, publicly, directly, and through the front door. Not by turning the dross of AIG's CDOs into gold by infusing taxpayer money into AIG. Ugh.

"Ayway, hindsight is 20/20, and I'm sympathetic to why the federal government took the strategy with the lowest downside risk at a moment when no one knew what was happening."

Ezra, just because you didn't know at the moment what was happening, do not for one minute think that nobody did.

Posted by: bgmma50 | February 9, 2010 4:48 PM | Report abuse

"Should the government be running AIG today?"

Why today? What about never?

Never works for me. Does never work for you, too?

Posted by: WrongfulDeath | February 9, 2010 10:53 PM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company