A Fighting Chance

“resign or go commit suicide”: Senator Chuck Grassley (Republican, Iowa) said on a March 16 radio interview: “I suggest, you know, obviously maybe they ought to be removed, but I would suggest that the first thing that would make me feel a little bit better towards them [is] if they would follow the Japanese example and come before the American people and take that deep bow and say I’m sorry and then either do one of two things: resign or go commit suicide.… In the case of the Japanese, they usually commit suicide before they make any apology.” Tahman Bradley, “GOP Senator: AIG Execs Should Follow Japanese Model—Suicide or Apology,” ABC News, March 16, 2009.

A similar approach should have applied during the 2008 crash: Under current law, banks are not permitted to file for bankruptcy, but the crisis—including the hundreds of billions of dollars in bailout money—was all in unchartered territory with no legal precedent. It would have been possible for the Treasury to lay out the terms of a bailout with the primary features of a negotiated Chapter 11 reorganization, including replacing the CEOs, imposing significant losses for the shareholders, requiring the creditors to bear some of the losses, and drawing up a new business plan. In fact, most negotiated reorganizations are done in the shadow of the bankruptcy laws, with the parties agreeing that there will be no formal filing, so long as the agreed-upon conditions are met. In addition, because of the unprecedented investment of public funds, the banks could have been required to help meet certain public aims, such as reduced foreclosures and increased lending to small businesses.

Sheila Bair believes such an approach should have been considered for Citibank, and she points out that a bankruptcy-like receivership could have been used through the existing authority of the FDIC: “I took the position that we should at least consider the feasibility of putting Citibank, Citigroup’s insured national bank subsidiary, through our bankruptcy-like receivership process. That would have enabled us to create a good-bank/bad-bank structure, leaving the bad assets in the bad bank, with losses absorbed by its shareholders and unsecured creditors. My request that we at least look at using our receivership powers was met with derision by the other regulators. Hank Paulson and Tim Geithner mockingly accused me of saying that Citi was ‘not systemic.’” Sheila Bair, Bull by the Horns, 123.

Under this scenario, banks that did not want to subject themselves to a negotiated reorganization could continue operations, but they would not receive TARP bailout money. While Sheila Bair makes it clear that Secretary Paulson and Secretary Geithner were unwilling to consider such an alternative because Citi and the other huge banks were systemically important, it is worth considering that the markets (and the economy) might have responded more positively to the news that TARP money was available if the largest banks needed it, but the terms would require some serious accountability and a change in banking practices going forward.

fall in line for partial payment: When AIG was running out of cash in late 2008, it began negotiating with creditors for write-downs of their debts. Elias Habayeb, the CFO who oversaw the Financial Products unit of AIG, reportedly tried to get creditors to accept discounts of as much as 40 cents on the dollar. See Richard Teitelbaum and Hugh Son, “New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers,” Bloomberg, October 27, 2009. Although it is typical to have creditors take some haircut, Tim Geithner, then head of the Federal Reserve Bank of New York, guaranteed creditors would be paid 100 cents on the dollar, placing the burden on taxpayers without having the creditors—including the counterparties to AIG’s credit default swaps—shoulder any of the losses. See Brady Dennis, “Fed Criticized for Not Negotiating Harder with AIG Creditors,” Washington Post, November 17, 2009.

walked away with $12.9 billion: One of the biggest beneficiaries of the government bailout of AIG was Goldman Sachs, which received a $12.9 billion payment from AIG. Once Goldman learned that the government was likely going to bail out AIG in 2008, it refused to take a haircut. According to one report, Goldman would later feature AIG as a “client success story,” even though its role in the bailout of AIG came at significant cost to the taxpayer. See Lauren Tara LaCapra, “Goldman, AIG and the Government Renew Their Friendship,” Unstructured Finance (blog), Reuters, April 15, 2013.