Tuesday, March 17, 2009

What Did They expect?

So now we know, after such a long period of stone silence and non disclosure that AIG had paid off 3 European banks and Goldman Sachs after getting federal bailout money. Everyone is outraged!

Goodness me. What did they expect? AIG was going under precisely it had owed a lot of people a lot of money in writing unhedged insurance derivatives. If AIG were not to be allowed to pay off its counterparties, then the former Treasury Secretary Hank Paulson should have had laid down very concrete rules as to how money could or could not be used.

But was it ever feasible? I am not sure. Money is fungible. Pouring new soup into a bowl of old soup, it becomes just soup. you cannot separate the two.

The outrage suggests this: the original rescue package under Paulson was totally without supervision or constraints, by design or negligence. The new economics team has no idea how Wall Street firms are run. Very comforting to be reminded of this on a daily basis. Have a good day.

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