Breach

AIG finally broke down and released the names of its counterparties.  Nothing too shocking.  The usual suspects domestic and international.  Still wondering why we're even bothering to keep the middleman alive.  

On another note, every employment contract I've ever seen, and I've seen a few at this point, make bonuses discretionary.  What gives with these AIG contracts?  I'm a big believer in the sanctity of contract, and I think one of the reasons that the dollar has managed to stay relatively strong in this mess is the fact that our Federal Court system is a relatively unbiased forum for settling contract disputes.  Investors know they can enforce their rights in the U.S., which is more than you can say for China or Russia.  But the fact that AIG was allegedly writing contracts for such a large amount of non-discretionary bonuses is suspicious.  When were these contracts written and what did signatories know about the state of AIG's balance sheet when they signed them?  There may be legitimate ways to void these contracts, at least as to the bonuses, that don't tread on the sanctity of contract.  Fraud and public policy comes to mind.  After all, AIG would have gone under and wouldn't have been able to pay these bonuses without taxpayer money.

Johnny Come Lately

John McCain adds nothing to the bailout negotiations.  The Keating Five affair is reflective of his judgment in financial affairs and crises.   And his alleged campaign pause to return to Washington to save the day is a cynical move that has disrupted the deal at hand.  If the Republicans cut a deal before he shows up, he will look irrelevant.  Thus they're stalling the deal until McCain can play his role.  

The Dukes of Moral Hazard

So the Federal Reserve, whose powers have been traditionally limited to the banking system, has now decided essentially to buy AIG and become the insurer of last resort for the credit default swap market.  This means that you and I, fellow taxpayer, are now on the hook for the irresponsible, irrational, and down right greedy behaviour of huge swaths of the market that wanted nothing to do with government regulation when the getting was good but who now are lined up at the governments door with cup in hand now that the risks have come home to roost.

This is a bad move, and one that it's not clear  the Fed can even afford to do, given the fact that the Treasury is now, wait for it, issuing more debt to insure that the Fed has sufficient liquidity in the days to come.  After re-establishing the moral hazard involved with trading exotic and convoluted credit derivatives by hanging Lehman Brothers out to dry, Paulson and company decide that it shouldn't apply to anyone who bought insurance for their derivative sludge.  But these weren't mom and pop investors who were buying this insurance in the form of credit default swaps, these were sophisticated investors who, if they'd paused for a moment and done their due diligence, should have realized that they were buying insurance from a speculator in the credit default swap market.  And that speculation was centered on the belief that there wouldn't be a systemic collapse in the credit markets.  Well, surprise surprise, yet another credit bubble has burst.  And the taxpayer is now footing the bill again.  

The sophisticated investors should be forced to take their losses.  The only people who should be bailed out are the mom and pop investors who stand to lose their retirement savings because of events they can't understand.  It'd be cheaper that way, and much more morally satisfying.