“SHE TOLD ME NOT TO PLAY AROUND, BUT I DONE LET THE DEAL GO DOWN…”

9/17/08

Time is understandably very tight these last few days, so I’ve had to limit my blog entries to my answers to e-mail queries from students, friends, and regular blog readers, all of whom show great insight and perspicacity.

Here is a response I sent to an e-mail I received from one of my most insightful correspondents on the AIG bailout:

9/17/08

Ah, don't you just love those free market Republican types? I guess they think the government should restrict itself to its proper function: bailing out Wall Street idiots. I don't see it at all, Don. The insurance policies at AIG's subsidiaries were safe; it was the holding company that was impaired. So what? Those who entered into CDS contracts with these guys were big boys and ought to take their licks. When you and I make stupid business decisions, the government doesn't bail us out.

I thought the government was proceeding, albeit slowly, on a righteous path: They bailed out Bear (bad), let the common and probably the preferred go on F&F (not quite as bad), and let Lehman go (almost) altogether (better). As I said on the blog, we weren't out of the woods as of Monday morning, but at least we weren't stepping further into them. Now comes AIG and all the progress toward making the market work goes down the drain. And then you have the problem of inconsistency. Why AIG and not Lehman? Could political influence have had anything to do with the Fed's and the Treasury's deliberations? To ask the question is to almost answer it.

And how much was BofA's arm twisted to buy Merrill at what looks, especially today, to be a very rich price?

Great thoughts as usual, Don. I might post my not quite as great responses on the blog.