The Continuing Blindness In the AIG Matter

Yesterday's Wall Street Journal carried Holman Jenkins' weekly column. This week's topic was Geithner, Goldman and AIG.

Jenkins engaged in some very humorous role play, contending that Geithner didn't really have much leverage over Goldman et. al. He articulated two options: total nuclear annihilation via an AIG-triggered systemic meltdown, or; explicit exchange of political favors for accepting a haircut on AIG positions.

After discussing the two options, Jenkins offered that a simple government guarantee of AIG's positions would have restored order to the market, probably without costing anything. Certainly less than a complete takeover and payouts to counterparties.

I think Jenkins' idea is sound, but he omitted one very credible alternative that Geithner & Co. have never discussed.

That is, a simple carving out of AIG's financial products unit for placement into bankruptcy. Such a move would have isolated the troubled portion of the insurer from the heavily-regulated insurance operations.

Once in bankruptcy, AIG's counterparties would no longer have a right to 100% payments for positions. But an orderly disposition could have occurred, again avoiding needless losses to US taxpayers.

It continues to mystify me why only one Journal contributor has ever raised this option. It's the default path for failing companies, and should have been the preferred option for AIG.

Geithner may or may not have been guilty of various malfeasances or neglectful inactions in the AIG situation. But one thing is sure. He and his team were surely guilty of a lack of creativity and perspective on the situation.