Stephen Foley: The banking crisis claims another victim

Saturday 09 January 2010 01:00

US Outlook: The decision by Christopher Dodd, the chairman of the Senate Banking Committee, not to seek a sixth term as Senator for Connecticut, is a reminder that the 2008 bailout of Wall Street is still causing unpredictable ripples in US politics.

Mr Dodd appeared likely to lose this November's election because of the campaign donations and the personal mortgage he took from financial firms that he was in charge of overseeing, and because he was instrumental in tamping down Congressional efforts to cap bonuses at AIG, the nationalised insurer whose very name enrages people here.

New revelations on the minutiae of the AIG bailout are also throwing curveballs. The Treasury and the Federal Reserve fatefully decided that the insurer's counterparties – most of the major banks, from Goldman Sachs on – should be made whole. The settled public view, from this distance, is that these banks should have been ordered to take a haircut. It is a view that conveniently forgets how fragile the financial system was and how quickly banks' finances could have unravelled if debts went unpaid, but no matter.

The AIG bailout is now seen as a covert, undemocratic way to bail out Goldman et al. This week's revelation that the Federal Reserve's lawyers in New York ordered AIG to omit details of the payments to its counterparties in regulatory filings has only fed into this conspiracy theory.

With Ben Bernanke's re-appointment as Federal Reserve chairman facing a challenge in Congress from politicians who want to reign in what they say is a secretive and overmighty Fed, these are details that we will hear more about. And in a political atmosphere that is more febrile than many people realise, anything might happen.

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