Did the Federal Reserve have any leverage in its negotiations with AIG counterparties, the ones it paid one hundred cents on the dollar to for stuff worth far less? And if it did have some, how much?

That’s the nut of the whole question, flared anew today by the release of a report on the deals by the Special Inspector General of the TARP (see our look at the press coverage from this morning).

Yves Smith of Naked Capitalism is hot at SIGTARP’s Neil Barofsky and now-Treasury Secretary “Turbo Timmy” Geithner, and says the press is misplaying this story:

The press is treating the report as if it was tough. I was sputtering with anger when reading it on how soft it was on the Fed. The positioning and framing of the issues was almost without exception far too forgiving. It read as if the findings had been negotiated with the Fed (and SIGTARP lost the negotiations as the “shape of the table” stage), but I am assured not, not by SIGTARP, but by those, as they like to say, in a position to know. That says SIGTARP is almost as badly cognitively captured as the Fed is.

It’s true the press is treating this as tough. That’s evidenced by the section-front treatment it’s given by The Wall Street Journal and New York Times (although that’s counterbalanced, as Dean Baker points out, by the A24 placement in the Washington Post.

Smith makes an awfully good case that the press overplayed it, and damns it for “uncritical reportage”:

Remember, the GAO covered this ground in a report in September. The SIGTARP did come up with some details, and did weigh in on where it thought the Fed went awry, but there is less new here than today’s headlines suggest.

Look, let’s get real here. The Fed paid out 100% on these contracts. AIG was trying to negotiate them down. Who knows how far they would have gotten, AIG went into crisis mode pretty quickly. There was absolutely no reason to pay 100%. Companies that get into trouble renegotiate their obligations as a matter of course. You cannot get blood from a turnip. And the fact that the Feds stepped in to prevent the financial system from collapsing is NOT THE SAME as an open-ended commitment to honor the obligations of a dead company.

Smith points to an Epicurean Dealmaker post from three weeks ago, which pointed out the lack of leverage AIG had. Remember, the SIGTARP report says the Fed had leverage but gave it up, or something:

What moronic financial entity—fully hedged or not—would really risk global financial catastrophe by throwing AIG into bankruptcy, even if it had the contractual and legal right to do so? Because it insisted on receiving 100% of the proceeds due to it by contract? Even though parties to financial contracts renegotiate existing terms under normal market conditions all the time? What good, for example, would those extra five billion clams—not collected, by the way, until the bankruptcy judge wound the company down, if ever—have done Goldman Sachs if it, Morgan Stanley, and every other major investment and commercial bank were in liquidation too?

Furthermore, what foreign or domestic bank CEO in his right mind has the balls to threaten the government of the United States of America with financial meltdown if it doesn’t cough up another couple billion dollars out of the public purse?

That makes sense, doesn’t it?

Smith also raises a very, very good point here on why the government deemed the sophisticated AIG’s counterparties worthy of a bailout but the less-sophisticated auction-rate securities holders not:

For instance, the report uncritically repeats (page 14) the excuse that the Fed was worried about the impact of an AIG BK on stable value funds. AIGFP had written $38 billion of them. First, did you see any Federal official run to the rescue when the $200 billion auction rate securities market collapsed? That was a retail market, and the users mistakenly regarded it as a near money market equivalent. Loss of access to these funds was far more catastrophic to many investors than taking a haircut on an investment provided by a dud company (those stable value fund investors should have been delighted to get even 60 cents on the dollar. They were so lucky as to have Goldman as a fellow creditor Does anyone think for one nanosecond that the Fed would have rescued AIGFP if its only creditors were stable value fund investors? Please.

This would be a good question for the press to put to officials. There are a couple more potential stories just in the quotes above.

Also, I’ll reiterate from this morning: Why did Geithner say that the “the financial condition of the counterparties was not a relevant factor” in making banks whole? That was uncritically reported by the Journal this morning, but at least it was smart enough to report it. I didn’t see anybody else pick up on that. Anyone want to take that on?

ADDING: Floyd Norris asks another very good story-worthy question: Who wrote the credit-default swaps that Goldman Sachs and Merrill Lynch bought to protect themselves from an AIG collapse? They are also big recipients of the bailout. (h/t Felix Salmon)

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.