In a world where shoppers for anything costing more than $10 expect to see a for sale sign, a world where workouts and restructurings that dramatically change the amount debtors ultimately pay creditors in the marketplace, a world where even the most predatory credit card issuing banks are usually willing to negotiate down outstanding debt of individuals to save on litigation costs, Uncle Sam, represented by our negotiator-in-chief Tim Geithner, still contrives to pay the full amounts due people who could easily be forced to accept less — manage, in other words, to pay retail with our money.
That’s what Mr. G did while heading the Federal Reserve Bank of New York when it was bailing out A.I.G. those few months ago. A unit of A.I.G. had insured the quirky derivative products issued by the likes of Goldman Sachs to the tune of billions of dollars. When these derivatives tanked big time, and the Goldman crowd stood to lose billions, they came to their insurer, A.I.G., demanding what they felt was owed.
Now of course A.I.G. itself usually attempts to negotiate down any claim against it. That’s what all commercial insurance companies have always done, as anyone who has ever put in a claim for, say, hurricane damage to a house has discovered. That sort of negotiating to get the best pay-off price possible wasn’t done with respect to the Goldman crowd’s claims, however.
A.I.G. didn’t have the money to honor its insurance commitments. Uncle Sam, represented by Mr. G., was called in to save the situation.
It must be remembered here that it wasn’t Uncle Sam who actually owed the Goldman crowd anything. The reason it became part of these negotiations was the threat that if A.I.G.s commitments weren’t met, the world economy would tank.
So here’s was the resulting situation. You had a claimant, the Goldman crowd, trying to get its money from an insurer that don’t have it, with absolutely no actual recourse but to go to court to do so, backed by the bluff that if the U.S. government didn’t pay the debt the world economy might unravel. On the other side was the government, whose own money comes from us, which does not owe the Goldman crowd anything, but which has to come up with something nonetheless lest the larger economy be threatened.
In this situation, here’s how the negotiation should have played out.
Goldman crowd: “We want our money and we want it all.”
Government represented by Mr. Geithner: “We’ll give you 50 cents on the dollar.”
Goldman crowd: “We’ll go to court. And by doing so the world economy will tank.”
Mr. G: “No, the world economy won’t tank. We’ll back A.I.G.’s other agreements in full, most of them are solid commercial agreements, and we’ll announce that we’re entering serious payment negotiations for your claims. This will settle the markets, and because of the way courts operate, your own claims won’t be settled for a decade or two. And then you’ll only get pennies on the dollar because we don’t owe you this money in the first place and A.I.G. won’t be able to do any better.”
Goldman crowd: Fifty cents on the dollar is too low. We might, just might, accept 80 cents.”
Mr. G.: Sixty cents. Take it or leave it.”
Goldman crowd: “Seventy-five cents and this is killing me.”
Mr. G: “Seventy. I have no authority to offer more. My hands are tied.”
Goldman crowd: “Alright, already. Take my first born, too. Seventy-two cents on the dollar and it’s done.”
Mr. G: “Deal.”
That’s how you’d do it to settle a credit card debt if you had to. That’s how the ABC Company would do it settling a debt it couldn’t pay in full to the XYZ Bank & Trust. Too bad the folks playing with our tax dollars aren’t quite that adept at protecting our money.