Towards the end of Session 1, a great deal of the questioning focused on why the government paid Goldman 100 cents on the dollar to unwind AIG’s Credit Default Swaps.

Some Commission members were griling GS’ Viniar as to why, although the market value of these CDS were roughly 48 cents on the dollar, taxpayers paid 100 cents on the dollar for them.

The New York Fed and the Federal Reserve Board were in charge of handling AiG’s unwinding. Viniar testified that the New York Fed only called once asking if they would consider a haircut (decrease in the price of the contract) on the CDS. Indeed, the New York Fed ultimately decided against requesting haircuts from any of AIG’s counterparties, not just Goldman. According to testimony from Neil Barofsky, special inspector general of TARP, the New York Fed felt that coercing haircuts from AIG’s counterparties would be inappropriate for two reasons: 1) It was acting on behalf of AIG, not as a regulator, and 2) "[it was] was uncomfortable interfering with the sanctity of the counterparties’
contractual rights with A.I.G., which entitled them to full par value.”

Should Goldman have accepted a haircut on AIG’s CDS contracts? It’s certainly true that Goldman would have been paid 100 cents on the dollar had the government not intervened and AIG failed, simply because those were the terms of the contract. As to whether Goldman should have taken the initiative to accept a haircut, one could make the argument that GS should have shown due consideration to the fact that it was being paid with taxpayers’ money. This, however, has to be weighed against the NY Fed’s legitimate concern that any appearance of backing away from the full support of AIG–paying contracts out in full–would have produced an adverse reaction from credit rating agencies, which itself may have rendered the bailout of AIG futile.