How "the most nauseating giveaway in the history of the country" came about

When the historians finally finish sorting through the appalling decisions that have been made in the past two years, this one will probably be at the top of the heap.

Last fall, as AIG began to realize how screwed it was, it started negotiating with the counterparties to all the credit default swaps it had written. One of the AIG's goals was to persuade these counterparties--including Goldman Sachs--to accept buyouts as low as $0.40 cents on the dollar.

These sorts of negotiations are exactly what should happen when a company gets in trouble. It goes to its creditors and says, look, we can't pay you everything, so here's your choice: Take something, or take your chances in banktuptcy court. (And, in this case, this wouldn't have been much of a choice, given the standing of CDS holders in the liquidation line).

But then Tim Geithner, head of the New York Fed, stepped in.

A few weeks later, the counterparties--all of whom voluntarily did business with AIG and understood the risks--were bailed out at par: 100 cents on the dollar.

Thus began the most nauseating giveaway in the history of the country.