mrhockey123

AIG Bailout: Over to Congress

To clarify my earlier point, what I meant was that if (and I'm not suggesting anything) microsoft wasn't around, it would be awfully hard to get support and updates for Windows products, therefore, they are in a sense a counterparty.

I just re-read my post and realized that paragraph made no sense...

AIG Bailout: Over to Congress

While the nationalization can't be good for the US dollar and for the children and grandchildren of the current generation, this was a necessary evil.

As others have said, I don't think we would want to wake up tomorrow morning in a world where AIG had collapsed. I was in favour of letting Lehman go - mostly because the Fed had to prove a point. I don't see the AIG backstop as contradicting that premise. There are some institutions that have such an insane amount of counterparties, and so much stuff on their books that they can't be allowed to fail

The truth is that shareholders DO deserve to get wiped out - if you invest in a bad company with bad management, that's your fault and your problem. The people that deserve to be saved (and the ones for whose sake this bailout is happening) are the related counterparties. These aren't people who invested in AIG, these are people who had indirect dealings with them. Yes, it's prudent to have some kind of cap on maximum exposure to a particular counterparty, but when something is as huge as AIG it's pretty impossible not to have an inter-dependence with it. For example, if Microsoft ceased to exist tomorrow (and I'm not saying it will) what in the world would everyone do? would it be your fault for backing a bad horse? not really, you just used the standard that probably 90+ percent of the world runs on.

Also, when you start looking at naked puts etc, yes it's your problem. you're the nut who took on unlimited risk. However, with exchange traded options, there is a clearing house which insures the transactions and which should maintain stability if someone defaults. When you're looking at OTC credit swaps, that becomes much more complicated.