The Financial Clusterfsck: Exploiting the Knowledge Gap

I’ve been thinking a bit about the exchange that went down in the Time Bomb post over at TPM, where they reprinted a readers claim:

You’re missing the point on AIGFP’s bonuses. The reason the government has no bargaining power is that failure to pay the bonuses — which, like it or not, AIG is contractually obligated to pay — would constitute a “cross-default” under AIG’s derivative contracts. Cross-default is considered an “event of default” under the standard ISDA Master Agreement (see sec. (5)(a)(vi)), which means that failure to pay the bonuses would allow AIG’s counterparties to terminate the CDS contracts and demand a full payout from AIG. With a derivatives portfolio of over $1.5 trillion, this is no small deal. Venting over AIGFP’s bonuses is fine, but urging the government to take an action which would result in hundreds of billions in losses to AIG (and thus the taxpayer) just because it would make you feel better is bad policy. Don’t let cheap populism become expensive populism.

Uh, yeah.  A subsequent reader (and really, TPM has some very smart readers, who contribute much to the discussion*)

This is simply not true. The bonuses are owed to AIG’s employees, not its counterparties. AIG’s employees are not parties to its ISDA agreements.

Furthermore conditions such as the payment of bonuses are not anywhere near what a “cross default” is. A “cross-default” would be if AIG failed to satisfy its obligations to Counterparty A, then Counterparty B could claim it was in default even if technically it wasn’t.

The contractual obligations that AIG are under are employee contracts…not ISDAs.
There’s no doomsday scenario here. The worst that can happen to AIG is that its
employees could sue it to obtain their promised bonuses.

Now, I don’t work in finance, but the first commenter’s claim that non-payment of bonuses would, on its own, trigger some cross-default provision struck me as absurd on its face.  And so I went to the cited model agreement section itself and saw that yes, there was no such provision and that the original commenter was full of shit.  But how many people would do that? His/her email to TPM is just another example of someone willingly exploiting the gap in knowledge (between the larger public and his/her specialized industry) for that industry’s benefit.  And it was intentional, to be sure – anyone who can cite a provision of the model agreement understands that it’s not relevant, here.  It’s disgusting, yet I see this sort of shameless exploitation replayed over and over again, in mass media discussion of the issue.  It’s a not faint echo of the approach that got us here in the first place – a belief that you can ignore the facts if you show enough confidence in your pronouncements.  Appalling.

*Like here!