Rant for a Friend, Pt. III

I didn't get around to posting yesterday - it was my lovely wife's birthday, so we went out and stimulated the economy last night.

Up today: the AIG bailout. This'll be a short one.

At the time the government took control of too-big-to-fail AIG, the company was negotiating to pay its credit default swap (CDS) counterparties at as little as 40 cents on the dollar.

The government takes over, and the New York Fed - whose president at the time was one Timothy Geithner - directs AIG to pay its CDS obligations at par.

Incremental cost to the US taxpayer: $13 billion. Not a particularly outsized number in these days of trillion-dollar deficits. But it is 0.1% of GDP, if that's important (and, as we'll discuss tomorrow, it certainly is to those in Washington).

And the guy who presided over this brilliant trading decision - what's he doing now?

Oh yeah, he runs the US Treasury. Awesome.

What's more, the CEO of Goldman Sachs was the chairman of the board of the New York Fed at the time, and the CEO of JPMorgan Chase was on the board as well.

Who were AIG's counterparties, who received 100 cents on the dollar instead of the 40 cents they were going to get before the takeover?

Among them were Goldman Sachs and JPMorgan Chase.

But wait, it gets better - when Bloomberg broke this story, they asked for a comment from a Treasury official. He said something to the effect that if AIG hadn't paid these counterparties at 100 cents on the dollar, the counterparties themselves would have suffered financially.

So in effect, this was another bailout to those banks. I guess that's one way to get around the TARP limits.

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Tomorrow, I'll present my little scenario describing just how the cash-for-clunkers and homebuyers' tax incentives came to be, particularly in terms of their timing.