Goldman, others get AIG payouts: The Fed’s moral hazard maximising strategy

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HMichaelPower's picture
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Goldman, others get AIG payouts: The Fed’s moral hazard maximising strategy

The Daily Digest of March 8 has a pointer to a Reuter's report entitled "Goldman, others get AIG payouts:report".

 Willem Buiter, a professor of economics at the London School of Economics, has an insightful blog on how this is The Fed’s moral hazard maximising strategy.

He writes:

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage.  AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held.  Of course the insurance was only as good as the creditworthiness of the party writing the CDS.  When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, “how sad, too bad” to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind “.. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

Click here to see the rest of the article.

DrKrbyLuv's picture
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: Goldman, others get AIG payouts: The Fed’s moral ...

The Fed has clearly become the most powerful center in our country.  Obama has already said that he wasn't his business to second guess the Fed.  Congress pretends to be upset but they are wholly bought and owned by the Fed.


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