Botched Bailout

The Special Inspector General’s report on the bailout of AIG is pretty damning. It concludes that the bailout — which was engineered by the U.S. Treasury and Federal Reserve and occurred on the Bush Administration’s watch — involved some gross overpayments on certain credit default swap transactions. In many instances the Federal Reserve “made whole” the counterparties to troubled investments where the counterparties would reasonably be expected to take significant haircuts on what were, after all, extraordinarily risky transactions gone bad. One of the counterparties that made out very well was Goldman Sachs, which just recently reported enormous “earnings.”

The Special Inspector General’s report on the AIG bailout just confirms, once again, that when the government intervenes in a “bailout” scenario it is the taxpayers who inevitably end up getting fleeced. I appreciate that, at the time, there was significant concern that AIG’s collapse would have been tipping over the first domino in a long line. Still, you would like to think that the Bush Administration and the Federal Reserve would have had sufficient savvy, moxie, and guts to negotiate fair compromises with Wall Street firms and international firms that were looking to profit from bad deals.