A Little Commentary on the Fed

It seems that the main issue here revolves not around the fact that the Fed bailed out $AIG, but that AIG paid out 100 cents on the dollar to $GS for the derivative contracts.  You know this already, or at least should.  I think everyone is in agreement that there was no other option but to bail out AIG, if it hadn’t happened we would all be standing on soup lines right now without a functioning financial system.  The argument is about the payout to Goldman Sachs.

Here’s my take.  I don’t like the fact that the government had to step in to the private sector to rescue the banking system in the first place, it wasn’t without precedent, but went far beyond anything we’d seen since the great depression.  I am a huge proponent of contract law, this government has broken it over and over again since the financial collapse, and if there is anything they should be held accountable for, it is this.

If the government decided to bail out AIG, making it a viable ongoing entity, they were required to pay Goldman 100 cents on the dollar, period. I don’t want to hear any crap about the fact that Goldman would not have gotten that payout if AIG went down, that is a bullshit argument, because it’s not the reality of the situation.  Under contract law, the government can not give AIG a bailout, and then tell Goldman to fuck off.  Yes, Goldman fucked up by not accounting for the agency risk it was taking by buying those derivative contracts from AIG, they should have known that if the market went the way they were planning, AIG wouldn’t be able to pay, shame on them.  But that does not mean they shouldn’t have gotten the full payout if AIG had the means to pay.

Look, in reality, the AIG bailout was just another way to rescue the lager financial system, think of it as a pass through entity.  Instead of the government paying out the holders of AIG’s derivative contracts personally, they gave the money to AIG and told them to pay.  This isn’t rocket science, and I don’t see why there is anything wrong with what they did.

This does not absolve them from all of the other moronic, idiotic, and atrocious things the Fed did leading up to the crash, but in my mind, their handling of the actual event was if not perfect, pretty close considering the circumstances.  There was no play book for what happened, and Bernanke stepping on the gas pedal when he did is the only reason why the $SPX trades above 600 right now.  Are we still seriously screwed, sure, this asset reflation farce didn’t solve a thing, but it did buy them some time to fake it until we make it.  And to those who complain that the banks are making too much money while the unemployment rate sits above 10%, screw you.  First off, the whole point of this asset reflation game was to get the banks healthy, otherwise we would not have had a functioning banking system.  You think things are bad now with the banks making money, you don’t even want to think about what it would have been like if Bernanke just let them all fail.  In due time, the government will stop allowing the banks to suck at the sweet teet of the Fed.  You should all be happy that Wall Street is back to some sense of normalcy and profit making.  

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