To Boabdil’s comment, I doubt the UK would want to nationalize the FP subsidiary, and it would probably be pretty interesting if the US sought to nationalize a UK-incorporated firm!

GS is not taking any losses on its AIG dealings. That means that someone else must take those massive losses instead. That someone else is the taxpayers.

It must be nice to have such powerful friends in high places. It’s too bad that the US taxpayers don’t have many people in DC who are interested in representing their interests.

I would think, all technical details aside, the mentality of government officials at Treasury, Fed, SEC, etc., has been a major problem. They’ve all drunk the cool-aid and believed their mission is to offer whatever sacrifices demanded by ‘the market’ so that it wouldn’t go down. I would challenge that mentality first, before discussing anything else.

It’s also breathtaking that it’s not even a scandal, when we look at the obvious revolving door between major investment banks (GS in particular) and government overseeing agencies. It’s hard for Paulson or anyone with his history to not treat GS differently in the financial crisis; similarly, it’s hard for Geithner or anyone in his position to not treat investment banks with kid gloves, when he might very well hope to go work for them at a senior position after the government stint.

The blatant conflict of interests speaks for themselves. I’m not by any means questioning any particular player’s personal integrity. I’m saying this system of the revolving door is corrupting and wrong and harms all of us. It should be changed, more buffer should be put in.

Had they done that, Goldman would not have taken the scorched earth route, and there would be no debate about their bonuses this year, because there wouldn’t be all those profits that the government subsidized or enabled.

But Geithner and Bernanke didn’t want to do this. They were afraid of Goldman and the other AIG counterparties. They caved in, demonstrating why they were working for the government and not for the banks – the banks never would have hired them at a high level job.

Also, the AAA rating wouldn’t result in the return of all collateral. Some (much? all?) collateral was triggered by a decline in the underlying asset, which would not have been fixed by a better rating. But collateral is not the main issue here — even if none had been posted, the contracts would have paid out during the unwind. I’m not sure the unwind was merely due to margin calls; it could also have been an attempt to stop the marked value of these from going lower, since AIG could no longer stomach an indeterminate downside risk on a massive portfolio. The only way to avoid paying out was to hang on to the contracts until the panic was over, which Felix suggests would have happened had it been nationalized.

An interesting question is whether nationalizing AIG would have triggered anything in Goldman’s contracts, whether with AIG or further down the line. It’s possible they could have profited massively from that — first if it triggered CDSs that Goldman took out on AIG from diverse parties, and second when Goldman benefited from its counterparty being upgraded to a `risk-free’ arm of the US.

Even though most of these deals were just being passed down the line, it’s clear that besides taking its cut along the way, Goldman was able to bargain for slightly better provisions in the structure of the deals, of precisely the sort that benefited it in the crisis.

Haven’t read your blog since you left Portfolio.com and I must say, you’ve sure kicked it up a notch here.

Good work!

All in all though, it is clear that nationalization would have been a far better choice than simply bailing out AIG.