Ben Bernanke and Tim Geithner are on the hot seat today, facing a not particularly friendly audience at a House Financial Services Committee hearing on AIG. And if the opening salvo from Spencer Bachus, R-Ala., the ranking Republican member on the committee, is any indication, the Republicans have found a promising line of attack.
Bachus zeroed in on the billions of taxpayer money that AIG transferred to its counterparties -- including, as the congressman was careful to specify, "Goldman Sachs" and several foreign banks. Bachus wanted to get Geithner to say that the counterparties "were paid 100 cents on what they were owed." Geithner preferred to use the formulation that AIG "fully met its obligations."
Geithner repeatedly attempted to state that the purpose of the AIG bailout was to avoid a "catastrophic" systemic collapse, but Bachus was manifestly uninterested in the purpose of the bailout. He wanted to know why Goldman Sachs executives weren't forced to eat their top hats.
"My question to you," said Bachus, "was there any discussion by you of a haircut?"
By "haircut" Bachus meant ensuring that the counterparties received less than what they were owed. If Goldman Sachs had bought a credit default swap from AIG, it was taking a risk -- why shouldn't it take a hit if AIG couldn't make good on its obligations?
Citing the lack of regulatory authority over a financial institution the size and complexity of AIG, Geithner began to answer: "We did not have the ability to selectively impose losses on their counterparties ..."
And then Chairman Frank's gavel came down -- Bachus' allotted five minutes was up.
There is little doubt that our government's regulatory structure has not kept up with evolution of the financial sector, but the excuse that the government's hands are so tied that it cannot impose its will when handing over $80 billion seems weak. In the heat of the moment, last September, with the smoking ruins of Lehman Brothers providing a chilling example of what can happen when a company fails abruptly, I can understand the urge to move quickly to avoid a repeat of that catastrophe. But that's an excuse that loses its potency as time passes.
And at this particular point in time, both Republicans and Democrats are keenly aware that the American public is not at all thrilled at the prospect that any more debts owed by companies such as AIG to companies such as Goldman Sachs will be paid in full with taxpayer dollars. Especially if, as Maxine Waters, D-Calif., strongly implied, both the Bush and Obama Treasury Departments are taking their marching orders from Goldman Sachs.
Everyone's a populist now, regardless of past ideological priorities. The people have spoken: Wall Street needs a haircut.