Wednesday, January 27, 2010

The AIG Soap Opera Continues

Tune in today for some fairly dramatic daytime television programming: the House Oversight and Government Reform Committee's hearing on AIG. The interrogations are unlikely to reveal any new information that points to a conspiracy among bankers and the Fed to siphon money out of taxpayer pockets into fat cat bankers' wallets. The truth is likely closer to the WSJ's description of emails between Fed officials in late 2008: "the emails paint a picture of confusion, uncertainty and fatigue among a small army of Fed staffers, lawyers and bankers on the rescue." So the bad news is, rather than finding a real villain in the AIG mess, the House is likely to be met with revelations of incompetence instead. I'm sure those Fed staffers were doing their best to stop the financial meltdown that was a "certainty" if the banks weren't paid 100 cents on the dollar on their CDS contracts. The real question remains: why on earth did nobody at the Fed see this coming until that fateful week in September 2008? It was widely known that AIG had a huge short CDS position, much of it tied to subprime. This became abundantly clear when its own auditor found accounting irregularities at the firm in early 2008, and the stock began its nosedive.

In any event, if we're really looking for a good conspiracy, perhaps Larry Fink from BlackRock should testify before the House and explain why his firm put out a 44-page analysis in November 2008 to the Fed that stated that the banks had significant bargaining power with AIG and had little incentive to cancel the contracts unless they received par, or 100 cents, on the dollar. But then again, if you are depending on a fund manager with very strong ties to Wall Street to tell you how much bargaining power you have with Wall Street, then you're bound to be in the noodle in negotiations.

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