Michael Lewis has a great rant on all things AIG-related up today at Bloomberg, in which he makes the argument that Congress and the American public are fools for expressing far more outrage about the $165 million designated for AIG employee bonuses, than the $173 billion that, he writes, "paid off AIG's gambling debts."
By any quantitative stretch of the imagination, $173 billion dwarfs $165 million, but "to the political process all big numbers look alike; above a certain number the money becomes purely symbolic ... You can generate as much political action and public anger over millions as you can over billions."
But I don't think people are ignoring the $173 billion. Sure, during Wednesday's congressional hearing on AIG, far more bluster was lavished on the bonuses than on anything else, but a minority of representatives -- notably Jeb Hensarling, R-Texas -- did make it clear that they thought the "greater outrage" was the taxpayer money channeled through AIG to counterparties such as Goldman Sachs and even some dastardly foreign banks. Still, there's no question, class warfare against derivatives traders makes for an easier sound bite than the technicalities of making counterparties "whole."
I do think Lewis errs in leaving out one key consideration -- the rationale for paying off AIG's gambling debts. Let's put aside the Goldman Sachs-runs-the-White-House conspiracy theories for the moment. The failure of Lehman Brothers precipitated a major financial crisis. I see no good reason to doubt the argument that Hank Paulson, Ben Bernanke and Tim Geithner honestly believed that letting AIG fail would make Lehman look like a mild disruption; that it would, to put it baldly, deepen the credit crunch to the point where another Great Depression was practically guaranteed.
Maybe we're headed for another depression anyway. Or maybe the consequences wouldn't have been as catastrophic as many feared. We'll never know the "counter-factual" of what would have happened if AIG had been allowed to collapse. What's done is done. But I don't think you can, as Lewis does, question the "morality" of the payouts to AIG's counterparties without considering the most obvious reason for having made them in the first place.
That does not explain, or justify, the Federal Reserve's reluctance to release the names of those counterparties. I can also understand the line of argument asking why the counterparties had to be "made whole" -- why did they deserve everything they were owed by AIG? Why not 50 cents on the dollar? No question: There is room for outrage any which way you look.
But let's not forget what's at stake here: The ongoing functioning of the global economy. Because from that perspective, even $173 billion is a relatively small number. The Federal Reserve committed on Wednesday to buy $1.2 trillion worth of long-term government bonds. The money to pay for those bonds is completely made up.
In this new landscape of magical Fed realism, we might well be past the point where morality is even an issue.
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