ProPublica has ridiculous article titled, Does AIG Really Need to Pay Its Counterparties in Full? Yes, AIG really has to pay its counterparties in full. The whole point of rescuing AIG was to keep it out of bankruptcy, and short of bankruptcy, there's no mechanism for forcing AIG's counterparties to take a haircut. But the ProPublica article really goes off the deep end when it says:
Another option is to break the contracts and let the counterparties -- many of which are themselves beneficiaries of federal bailouts -- sue the federal government, if they dare. ... Such a suit may not fare well in court because some legal questions swirl around whether the bulk of credit default swaps are legally enforceable. Some of the swaps function like insurance policies on corporate bonds. Purchasers of such credit default swaps know that even if the bond issuer defaults, they will limit their losses. But many other swaps are more like bets (akin to buying "insurance" on another person's house), and it is unclear from a legal perspective if there is enough of an insurable interest to make the contracts enforceable.Wow. First of all, it's simply not true that "legal questions swirl around whether the bulk of credit default swaps are legally enforceable." Standard credit default swaps are enforceable. The credit default swaps that AIG wrote are enforceable. If the government breaches the contracts and refuses to pay, the counterparties will sue, and the government will lose. The author clearly shows that she has no idea what she's talking about when she says that it's "unclear from a legal perspective if there is enough of an insurable interest to make the contracts enforceable." Credit default swaps are not insurance contracts, so there doesn't need to be an insurable interest! CDS are like insurance contracts, but there are key differences. Just because a CDS contract doesn't fit the statutory definition of an "insurance contract," doesn't mean that it's not enforceable. Honestly, the complaints about AIG paying its counterparties get more idiotic by the day.