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Contract law versus moral law: Goldman's $12.9 billion Geithner gift

|Includes: AIG, Goldman Sachs Group Inc. (GS)

Tim Geithner's gift to Goldman Sachs just won't stay swept under the rug.  At issue was whether it was right or wrong for Treasury to step into the middle of advanced negotiations that were about to payout at 50 cents on the dollar and decree they be paid out at 100 cents on the dollar with tax money.  

Goldman's position is that "the government stepped into AIG's shoes" and therefore had to honor its contract with Goldman in full" as David Viniar, GS CFO said in the midst of an inquiry today.  Unfortunately for Goldman and Treasury, there is absolutely no legal precedent for this.  The RTC certainly didn't attempt to make S&L's whole in the 1990's.  Everyone took a boot camp style haircut in the 1979 Chrysler bailout.  Why the unprecedented treatment for Goldman?

Or is Viniar right?  When the government stepped in and essentially became AIG through an 80% equity stake, did they inherit all of AIG's responsibilities at 100 cents on the dollar baring insolvency/inability to pay?  The key difference is AIG lacked the solvency/ability to pay at 100 cents on the dollar, but the government did.  Perhaps an agreement between the government and Goldman prior to taking an 80% ownership could have averted any legal uncertainty and saved taxpayers $6 billion.

I would argue that without a prior agreement Goldman may actually have a case.  But by the same token it was somewhere between grossly irresponsible and grossly corrupt for the government to not take the necessary legal steps to avert a 100 cents on the dollar payout of taxpayer dollars through a failed company to the richest guys on Wall St.



Disclosure: none