The New York Fed's handling of AIG derivative contracts screams against expanding the net of "too big to fail" financial institutions. WaPo reported:
New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government's rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.
Uncle Sam made AIG's counter parties whole.
Lawmakers and financial analysts critical of the payouts say it amounted to a back-door bailout for big banks. AIG, the recipient of a $180 billion federal rescue package, ended up paying $14 billion to Goldman Sachs over months and $8.5 billion to Deutsche Bank, among others. Before the New York Fed intervened, AIG had been trying to persuade the firms to take discounts.
The government not only saved the company, it backed AIG's skanky financial products to the tune of 100%. Bankruptcy and breaking up "too big to fail" are the answers.
Expanding Uncle Sam's implicit guarantee for shadow bankers is a bad idea. It shows just how sick and intertwined the Government-Industrial Monstrosity has become. How much extra will citizens pay in the future for "nonbankruptcy" wind downs?
Be sure to thank the silent on this issue Tim Geithner, should you run into him. Does he know who underwrote credit coverage on AIG? Those firms are the beneficiary of one great gift.
Note: China said it would renege on its derivative commitments.