The NYT alluded to the AIG bailout in the context of the GM negotiations without giving readers the full context. Representative Thaddeus McCotter, a Republican from Michigan, complained that it would be outrageous if the government were to honor credit default swaps (CDS) issued against GM bonds for creditors who are refusing to accept a deal for a write-down on their GM debt. The point is that the CDSs issued by AIG should be worthless at present. AIG is bankrupt and has no resources to pay any portion of these CDS without the government's backing. However, if the government steps in and honors CDSs issued against GM debt by AIG at market value, as it has done with other CDSs issued by AIG, then creditors have far more incentive to take a hard line in negotiations on debt write-downs. In effect, the government is paying these creditors not to reach a deal on write-downs. The Treasury department has yet to give any explanation for the $160 billion (@ $1300 per household) in payouts that it made through AIG. This money has gone to several of the largest Wall Street banks, as well as several large foreign banks. There was no legal obligation whatsoever for the government to make these payments and in some cases there would not have even been a legal obligation for AIG to have made these payments, if it could have survived without government money.
--Dean Baker
