November 01, 2011
The NYT headline told readers:
“G.A.O. Says New York Fed Didn’t Cut Deals on A.I.G.”
That should have us all reassured. After all, we don’t want our government cutting deals when they bail out huge financial institutions.
Actually, the story says pretty much the opposite. The story tells how the Government Accountability Office (G.A.O.) found that the New York Fed made little effort to try to force banks to make concessions after it took control of A.I.G.
The point is that A.I.G. was effectively bankrupt and unable to pay all of its debts. In such circumstances it would have been reasonable for the New York Fed to insist that the creditors, in this case large banks like Goldman Sachs, accept some losses. These banks should understand that they take risks when dealing with financial institutions that are in questionable financial shape and should suffer some loss when they make a bad bet. However the government bailout of A.I.G. ensured that they suffered no consequences from their mistake.
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