Eliot Spitzer took Treasury Secretary Timothy Geithner to task in Slate yesterday, accusing him of incompetence in handling the AIG bailout, particularly the full payment to swap counterparties like Goldman Sachs. Spitzer’s basic position is that since the government had all the money, it should have played hardball and forced everyone to take a haircut, which is standard practice in workout situations.
As Spitzer says, “The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk.” He further notes ““In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court.” Spitzer also references the auto company bailouts, in which the government did play hardball and forced all parties to make concessions.
Regular Thoughtbasket readers will recall my supportive comments (read them here and here) of the government’s aggressive position during the auto bailouts, and so it shouldn’t surprise you to learn that I agree with Spitzer here. Geithner should have been far more forceful in making everybody feel some pain for doing business with AIG. As Spitzer says:
“Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme. Forcing them to give concessions would have been one small step toward ending the moral hazard the Fed had allowed to flourish for years.”
This seems like a good opportunity to point out the risk of having career bureaucrats deal with business situations like this. Geithner was out of his league going head to head with Wall Street. Geithner has only worked in governmental positions, except for a couple of years at Kissinger Associates, which is essentially a government position. On the other hand, the guys who ran the auto negotiations, Steve Rattner and Ron Bloom, have significant real-world experience, as investment bankers and, in the case of Bloom, negotiating workouts of failing steel companies. This is why any government agency that deals with business needs to have at least some businesspeople in high-level positions.