Global Strategy - blog

When national governments and politicians make decisions about economic policies, they often shape the viability of businesses at the industry level.

With its policies -- regarding e.g. taxing, public spending, or regulation -- a government may consciously choose to support certain industries (e.g., defense industry, private healthcare industry, biotechnology industry). Sometimes, a government may even consciously choose to undermine certain industries, while supporting others (e.g., undermining coal industry while supporting solar and wind power industries; undermining tobacco industry while supporting health foods industries).

Now, whereas industry-level support decisions are common, it is quite rare that governments need to or will make choices about which individual companies to support or undermine.

However, these individual company -focused choices are what governments around the world are finding themselves to make at the moment.

For the US government the choice-making situation has probably been the most challenging. During last fall, the most infamous choice was the one to let Lehman Brothers fall, while letting Morgan Stanley, Goldman Sachs, and some others live with government subsidies or regulatory amendments.

Why such a choice?, have many asked. One of the basic speculations is that the secretary of US treasury at the time -- Hank Paulson -- was at least not willing to let his former employer, Goldman Sachs, fall. In contrast, there indeed was willingness to let the competitor bank, Lehman Brothers (led by the dislikeable? Dick Fuld), exit the industry for good.  

One of the wildest speculations has been that the decision to let Lehman Brothers go down even had to do with Venezuela. Venezuela held at least $300 million in debt instruments that Lehman had agreed to cash (see a related WSJ news). Lehman's going belly up would, hence, be a bit of a pinch towards Venezuela and Hugo Chavez.

The current government choice-making concerns American International Group AIG.

Or, actually, the choice seems not be so much about AIG as it is about firms that are exposed to AIG -- due to credit default swaps (CDSs) they have bought from AIG. Should AIG default or go bankrupt, those firms would suffer severe losses -- and perhaps go belly up themselves.

In other words, not only is the US government choosing to rescue AIG from default and the broader financial industry from another shock. It is also choosing to save the skin of certain firms exposed to AIG.

But what are those other firms, then? Interestingly, no one seems to know -- and the government won't tell (see a NYTimes blog entry).

Of course, many seem to think, again, that it is Goldman Sachs that the government is protecting while bailing out AIG. Arguably, it is especially Goldman that has a considerable exposure to CDSs by AIG. And after all, the US treasury department has been referred to as "Government Sachs" by itself New York Times (see the story).

In any case, there are obviously some strings attached in the current bailout choices by US and other governments. And those strings are attached not only to industries, but also to individual corporations.

 P.S. A few days after the initial posting of this blog entry, Wall Street Journal as well as Fortune published lists of the AIG's assumed counterparties in its CDS contracts. See the WSJ article and the Fortune article. Goldman Sachs was indeed at the top of the lists. Interestingly, the lists also include some prominent European banks, such as Deutsche Bank and Danske Bank..

 P.P.S. Ok now, AIG finally agreed to publish a list of the counterparties of its deals, i.e., the beneficiaries of the bailout monies given to it. The firms mentioned in the above story are included on the list. See the list on New York Times website: http://www.nytimes.com/2009/03/16/business/16rescue.html?hp