Changing Perspective on the Bailout

A shift in perspective is underway, and the public perception of the AIG bailout illustrates it.

Until very recently, the mantra weirdly reflected the 'good bank/bad bank' idea. There were good banks--like Goldman Sachs or JP Morgan, and there were bad banks--like Citi or WAMU. Also, of course, there were lousy banks will agility--Merrill or Wachovia. The government was busily bailing out the bad and the lousy so that the competently managed institutions would not be swamped by the splatter from the failing ones. This was the dread 'systemic risk.'

However, in the last week or so, I've begun reading descriptions of the AIG bailout that conceptually are dismissing AIG as a mere conduit for federal assistance that is, in substance, being received by the AIG counterparties. In other words, the ultimate bailout recipient is perceived as Goldman, not AIG, because Goldman was the counterparty receiving large sums initally channelled through AIG. This perception is being fanned by some lying done by Goldman and its spokesmen when The New Yorks Times attempted reporting the story last fall.

The minute you stop treating counterparties as innocent victims who, in the interest of addressing systemic risk, should be made whole, and start thinking of them as bailout recipients, you have taken a gigantic step towards a paradigm shift. We seem to be realizing that the so-called competently managed institutions were merely more adept at gaming a fundamentally flawed system. They were gamblers in the casino like the others, just a bit luckier or better at the odds.