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.
February 9, 2010; 8:09 AM ET
Categories: Financial Crisis
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