Can Beggars Be Choosers?

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Let’s go back for a second to this issue of who the AIG bailout money is really going to. Nocera said AIG considered the information ‘trade secrets’. TPM Reader SR says what he probably means is that the contracts are subject to mutual confidentiality agreements between both parties, which sounds to me like something that would be routine in cases like this. And a number of other readers have made the same point; and noted that this is not a bad thing.

Says SR

I would be stunned if AIG’s credit default swaps weren’t subject to mutual confidentiality provisions as a matter of contract. (“Trade secret” is a different area of law, though it interacts with contract law to some degree.) AIG/Uncle Sam may have their own reasons for wanting to keep the identity of the beneficiaries of AIG’s ill-advised credit default swaps secret, but what they don’t want is to get sued by the other parties for breaching those provisions.

And, if you were a party to a credit default swap with AIG that’s getting paid off by the government, would you want that fact revealed?

AIG is still bound by its contracts. Nationalization doesn’t change that. At least, not in this country.

When I wrote back to SR, what I said was yes, but … it really depends on what construct you’re working within on the payouts of this money. If you think that AIG is a public company in which the US government has purchased a majority interest, then, sure, the contracts still apply. But as best I understand this, by any reasonable measure, AIG went bankrupt. And the parties that were unfortunate or foolish enough to buy these credit default swaps that AIG had no ability to pay out on are out of luck. The other party went bust. That’s capitalism — the fate of companies poorly judge risk.

Now, maybe these counter-parties decide to petition the US government for relief. And perhaps at the level of systemic risk, it’s in our interest to make good on these contracts. But that’s a different kind of arrangement. That’s something outside the strictures of the original contract. I know there’s a separate issue of whether too much transparency could trigger runs on banks or other similar panics. I’ll set that aside for the moment; because I don’t have the understanding to really evaluate that properly. But with regards to the counter-parties themselves, mustn’t some ‘beggars can’t be choosers’ logic apply?

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