Of Bailouts and bondholders, pt 2

I wrote yesterday lamenting the lack of transperency about which counterparties are effectively getting the taxpayer dollars via the bailout of AIG. And as far as the empirical question of untransparency, I found this piece by Roubini buttressing:

Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.

News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

However, on further reflection about the political wisdom of insisting on transparency, I've become a little more ambivalent. On the strict merits, transparency is obviously a good thing, and I continue to support it.

But what I've also realized is that the political reaction to the revelation of the counterparty beneficiaries might not be the one that I might wish. Specifically, while there would undoubtedly be some left-populist outrage at the hedge fund plutocrats who are getting their taxpayer-funded checks from AIG, there would also likely be right-populist outrage at the foreign banks that are also inevitably getting some of this money. And that's a disconcerting prospect, since the one thing that would turn the current crisis from merely a possible Depression into a certain one, would be a series of jingo-inspired attempts to attack foreigners, including foreign banks, investors, and producers. Competitive nationalist financial reactions would really recapitulate the spiraling political economy of the 1930s.

The unfortunate fact of the current situation is that we must all hang together, or we will surely all hang separately.