Don't Blame Goldman Sachs. Don't Blame Us. Blame the Meltdown.

I suppose it is a truth universally acknowledged that Goldman Sachs is what would happen if Darth Vader had a particular skill in managing IPOs. The toxin-dripping animosity toward the bank partly stems from the way Goldman made out like gangbusters when the government bailed out AIG and awarded Goldman 100 percent of securities that had depreciated. I've had mixed feelings about the Goldman hate for some time now, but I think Felix Salmon hits the nail on the head:

I agree with [bailout watchdog Neil] Barofsky that, in hindsight, the payments should have been made at less than par; TED has a good explanation of how that could have happened, given sufficient aggression. After all, it's not like Treasury wasn't being run by a hard-charging former investment banker at the time...

But the government owned AIG, which created the situation that Germans call Anstaltslast: the fact that state-owned companies simply don't default on their obligations. The government was also battling a major crisis using the only weapon at its disposal: enormous amounts of liquidity. When you're putting out a fire, you don't stop to worry that large amounts of liquidity are going to end up where you don't particularly want them -- the important thing is putting out the fire.

So yes, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG's counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it. With hindsight, it now seems that companies like Goldman Sachs have turned out to be the biggest winners, paying out billions of dollars in bonuses even as the rest of the country struggles with an extremely nasty recession. But that wasn't particularly foreseeable.

Yes. Those are exactly the words I've been trying to coax from my fingers now for months. It's not simply the legal iffiness of forcing losses on counterparties outside of bankruptcy courts. It's the practical mess of forcing losses on counterparties outside of bankruptcy courts in the middle of a financial meltdown when your purpose is, fundamentally, to protect losses in any way possible.