Do we really want to abrogate contract law?

The hysteria over AIG continues. Now the big outrage is that it used bailout money to pay off banks around the world. Taxpayers, whose 401Ks are already in the toilet, take a haircut, while Goldman Sachs gets 100 cents on the dollar.

Sure, it’s galling. But it’s galling when a murderer gets off on a technicality, too. I still wouldn’t change the system…

AIG had contracts with these guys, plain and simple. If it broke those contracts, why would anyone want to do business with it again — thus even further diminishing the value of the assets the taxpayers now own?  And if the government encouraged — what I really mean here is forced — AIG to break those contracts, why would anyone do business with a government-supported entity again?

And let’s go even farther. If the government makes it clear that it’s okay to renege on contracts if you’re in a financial hole, why should I trust FDIC-insured bank accounts? Seems much smarter to pull my money out and stuff it in my bra.  That kind of attitude would really help the banking system, right?

The banks and investment firms that ended up with A.I.G.’s bailout money last fall were, in many cases, counterparties to derivatives contracts it had sold, known as credit-default swaps, which guaranteed the value of assets in their investment portfolios. Had A.I.G. not been bailed out, and simply allowed to go bankrupt, they would have suffered investment losses running into the billions of dollars.

via Lawmakers Ask Why A.I.G. Paid Counterparties – NYTimes.com.