We appear to have an instant consensus that the New York Fed could have reduced the cost of AIG assistance by negotiating a haircut on money owed to its counterparties. I don’t know if that’s the case or not. However, I do have a couple of points to make in the interest of fairness as we rush to judgment.
First, as has been said over and over, the point of a “bailout” or assistance to a systemically important institution is not to save the institution itself but to limit the collateral damage. If that is the rationale of the assistance, it would seem inconsistent to intervene and then inflict the damage on counterparties that the intervention was intended to prevent. And, can you give some counterparties a haircut and not others? It’s a can of worms the New York Fed apparently decided not to open.
Second, the original $85 billion “bridge loan” made by the Fed was assumed to be paid back as AIG assets are sold. That amount has since grown through TARP, but an eventual payback is still likely. That means that taxpayers will not bear the cost of making the counterparties whole. It will be borne by AIG’s owners.
Third, and less important, we should recall the extraordinary events that all seemed to be taking place at once during that week in September 2008. Monday morning quarterbacking over a year later shouldn’t assume that what has become clearer in the past year was clear then.