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Friday, November 27, 2009

"Muddying the Waters on AIG"

John Berry defends the Fed and Treasury's assistance to AIG:

Muddying the waters on AIG, by John M. Berry, Commentary, Reuters: Neil Barofsky, inspector general of the Troubled Asset Relief Program, is making a name for himself with a misleading analysis of actions by the Federal Reserve and Treasury in combating the financial crisis.
A column in the New York Times called Barofsky “one of the few truth tellers in Washington”... Barofsky’s report, which is logically flawed, uses loaded language to create the impression that saving the economy wasn’t the Fed’s goal at all. No, it was all about helping the central bank’s friends on Wall Street.
“Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG counterparties...,” the report says. ... The report duly notes that Fed officials deny a backdoor bailout was their objective. But the next sentence suggests the officials must be lying.
“Irrespective of their stated intent, however, there is no question that the effect of the Federal Reserve Bank of New York’s decisions — indeed the very design of the federal assistance to AIG — was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG’s counterparties.” (Emphasis in the original.)
Well, AIG had sold the counterparties a great many credit default swap contracts covering collateralized debt obligations secured by mortgages. ...AIG owed the counterparties a whole pot full of money which it couldn’t pay.
If AIG was to be kept out of bankruptcy, of course the very design of the federal assistance had to include funneling tens of billions of dollars to the institutions to which it was owed. There was no other way to avoid a bankruptcy that would have affected not just big financial institutions but thousands of municipalities, individual savers and other investors. ...

The report does not offer an alternative way to avoid an AIG bankruptcy, and there wasn’t one. It does, however, suggest the Fed should have used its power as a banking regulator to force the AIG creditors to accept less than full payment of what they were owed.
The report acknowledges that the New York Fed tried to negotiate such a haircut... But the French banking regulator said it would be illegal for the two French institutions involved to take a haircut unless AIG was in formal bankruptcy, and the Fed said it had to treat all the banks the same way.
Nevertheless, Barofsky insists the Fed should have used its authority to force concessions. Unsaid, but implied: The Fed didn’t do that because its goal was to help its Wall Street friends.
Barofsky is getting great press and kudos on Capitol Hill by pandering to the public anger at Wall Street. Pity he’s not really a truth teller at all.

    Posted by on Friday, November 27, 2009 at 11:18 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (9)

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