The Congressional Oversight Panel released a great report on the AIG bailout, here. Lots of fun stuff about the timeline of events, explanations of Maiden Lane and TARP involvement, a nice discussions of whether AIG is now solvent or not, etc. But what I really liked was the debate on whether there were more than two options on those fateful days in September 2010. The principals contend that it was either let AIG fail or instead bail completely, the way they did, making counterparties whole. But the COP suggests that the Treasury and NY Fed could and should have used their powers of intimidation. Let me quote the report:
“ . . .was it the role of FRBNY to attempt to use all the tools at its disposal to induce entities it regulated to do something they did not want to do in the interests of systemic stability? The Panel believes that FRBNY at that moment did not see such inducement as its role. The Panel believes that in such a crisis, with the stability of the financial system and the integrity of the regulatory system in jeopardy, that FRBNY’s role was to do just that: to ensure that those private parties that benefited from the stability of the financial system would contribute to its preservation.”
Seems like dangerous ground to me. With GM, some counterparties refused to negotiated writedowns, and the government let GM go into bankruptcy and there, with the help of a judge, writedowns were imposed with the usual rules. In the case of AIG, the government was prepared to pay the full cost of not letting AIG go under, so any attempt to get writedowns/concessions from counterparties would be bluffs and potentially only enforced by strong-arm tactics. What if I, a private bank, was willing to risk my direct losses from an AIG bankruptcy and believed the contribution of such a bankruptcy to systemic risk/crisis was small. Would it be appropriate for FRBNY to lean on me as my regulator to force me to take less from a private contract? Very interesting debate.
Again from the report:
“The record appears to be clear that in the absence of outside funding AIG would have been insolvent by the end of the day on September 16, 2008. In the end, FRBNY provided immediate funding that night. Ultimately, it is impossible to stand in the shoes of those who had to make decisionsduring those hours, to weigh the risks of accelerated systemic collapse against the profound need for the financial firms that FRBNY was rescuing along with AIG to share in the costs and the risks of that rescue, and to weigh those considerations not today in an atmosphere of relative calm, but in the middle of the night in the midst of a financial collapse.”