http://blogs.telegraph.co.uk/gerald_warner/blog/2009/03/18/president_barack_obama_should_serve_the_taxpayers_not_goldman_sachs_and_liquidate_aigPosted By: Gerald Warner at Mar 18, 2009 at 19:52:00
Posted in: Eagle Eye
Barack Obama cannot walk on water after all, but that is unsurprising since he has four massive weights shackled to his ankles: AIG, Citigroup, Fannie Mae and Freddie Mac. Of these, the most urgent challenge is posed by AIG. The current row over the payment of $165m in bonuses - an outrage, admittedly, especially since 11 employees who received more than $1m in "retention" bonuses have already left the company - is a distraction, like Sir Fred Goodwin's pension in the UK, from the main concern.
Barack Obama and Tim Geithner have one sensible option: they must send the liquidators in to AIG to pick the bones clean. The sooner they take this drastic action, the more effective it will be. The perception is growing that the real motive behind the AIG bailout is to save the posterior of Goldman Sachs: AIG appears to have become a staging post through which billions of taxpayers' dollars travel into the coffers of Goldman Sachs and other banks.
The question is also being asked why Goldman Sachs' chief executive Lloyd Blankfein sat in on meetings discussing the AIG bailout. The core of the AIG problem and, by extension, of America's banking crisis, is the question of Credit Default Swaps (CDS), the contracts invented by a team working for J P Morgan Chase in 1997, regarded as state-of-the-art financial practice and imported into the banking system like a plague bacillus.
The exposure to CDS liabilities amounts to $15 trillion. Forgive an inquisitive foreigner questioning Uncle Sam's credit worthiness, but does America actually have that kind of money to spare? No, is the evident answer. So, what is to be done? The Obama/Geithner formula seems to be to throw exponential amounts of taxpayers' money at AIG to delay the inevitable. But there is one procedure that would solve the CDS problem at a stroke: the bankruptcy process would allow all these toxic CDS contracts to be torn up, to the relief both of the financial system and the taxpayer.
Why will Obama and Geithner not take this course? It might sound perverse to describe Lehman Brothers as a success story, but in the present dire circumstances it could be called that: liquidation of Lehman has allowed its viable divisions to put down fresh roots. Why will Geithner not do the same with AIG? Financial commentators were quick to notice the startling similarity between Geithner's bank bailout plan and proposals that Goldman Sachs had been hawking around for a month beforehand.
Timothy Geithner is toast: even the Treasury cat knows he cannot survive. The present policy is madness. Anybody who listened to Barack Obama's campaign speeches would have presumed that, in a conflict between the interests of the suits on Wall Street and the families on Main Street, Obama would not hesitate. Nor has he: the suits have it. Meanwhile, AIG is the mortal wound sapping life from the Obama administration. Change we need? Hope? Some hope.