AIG

As close friends of mine know, one of my great political/financial obsessions these days is that someone (you go get'em Rep. Issa!) gets an answer as to why the Fed's bailout of AIG paid out the insurer's counterparties at 100 cents on the dollar, a situation that many now believe was a back door bailout of the Wall Street firms like Goldman Sachs and foreign banks. The case gets curiouser and curiouser the more digging into the transaction that goes on.

Why did the Fed, with Treasury's support, not negotiate a better deal for taxpayers. Why has the NY Fed gone to such lengths to conceal details of the deal? Going so far as to advise AIG not to provide the SEC with info it was asking for about the counterparties and finances. Why has the Obama administration gone to such lengths to stonewall a deal that was crafted by Bush administration officials? What does Tim Geithner know and when did he know it?

My opinion is that Scott Brown's victory last week can be tied to this administration's handling, or mishandling, of the entire AIG episode (which is a larger proxy for Obama's protection of Wall Street at the expense of the middle class): from the bonuses to still not providing a cogent and comprehensive explanation as to why the Fed insisted AIG's counterparties get fully paid on "contracts" that were going to be worthless without Fed aid.

Tomorrow the House Oversight Committee holds a hearing on the issue that hopefully will shed some light on the deal. 

In the meantime, we get the NY Fed's general counsel's prepared testimony. As the NY Times' reports, Mr. Baxter explained that the New York Fed felt compelled to pay out A.I.G.'s counterparties in full to unwind derivative contracts because "there was little time, and substantial execution risk and attendant harm of not getting the deal done by the deadline of Nov. 10," when A.I.G. was scheduled to report its earning and could face downgrades from credit ratings agencies. That would have led to more collateral calls and even greater liquidity problems for A.I.G., Mr. Baxter said."

In other words, the Fed had to pay par value on the derivative contracts to AIG counterparties because if they didn't, AIG would have been downgraded, it's finances further destabilized and....AIG's counterparties would have received less than full value. D'oh!