The steps were hardly "reasonable" if they wanted to avoid risk.  That’s why we have a global financial panic going on.  That’s why no group of private corporations wanted to put up $85 billion.  These weren’t "insurance policies" as the term is conventionally used. 

We tell every Tom, Dick and Harry that if it sounds too good to be true, it probably is. I feel comfortable applying that same logic to finacial firms as well.

If the assets are really there in AIG, then letting it fail was the free market answer.  But the financial markets clearly don’t think that is the case, and why they feared cascading writedowns, and bankruptcies.  Now, it is possible the assets are there.  But it is hard to know, because the whole CDS matter is unregulated, and not transparent.  Nobody really knows.  Another reason the counterparties actions were not responsible efforts to avoid risk.

To call the govt’s plans a "trial balloon" is to understate what is going on.  It is pretty much a done deal, with about the only thing to be decided is what other goodies are gonna be in the legislative package.  This is a pretty comprehensive plan to bail out large investors from their risky investments. 

As for SS, how long did it take from the Great Depression for there to be a sufficient number of voters to seriously consider privatization?  Your 401K may be doing fine, but where would it be it the govt hadn’t involved itself in this mess?  The claim being made by Paulson,  Bernanke et al was the probability of a Depression like global financial meltdown. 

The voters are hearing that.  People don’t oppose 401K’s and IRA’s.  But fear is a more powerful motivator than greed (see the current behavior of global markets) and they want that SS floor underneath their other financial plans.   
 

If AIG clearly didn’t have enough assets to cover the counterparties, you’d have a point that the counterparties should have seen it coming. But all appearences are that with the bailout package to smooth out AIG’s dissolution, there will be plenty of money for the counterparties and for the Fed. Most or all of the bondholders will get paid back, too, and there may even be money left over for the shareholders (of which the Fed will take an additional pound of flesh, to punish AIG for not accepting an earlier bailout package offered by private firms).

As for the trial balloon about the government taking over bad debts on a large scale, I’m not familiar with the details, but I’m pretty sure I’m against it.

How does this take Social Security privatization off the table for the next 50 years? I just checked my 401(k), and it seems to be doing fine, despite me owning AIG stock (indirectly, through an S&P 500 index fund).

And of course, if Pigs had Wings. . .

I don’t have any problem with the counterparties getting what they can from AIG, but you said "These are the people <b>we</b> *want* to bail out".  Sorry, these are speculators willingly incurring risks, and they need to eat it if AIG is insolvent.

Now there is apparently talk of the govt taking over tons of bad debt from companies that are still in business.  What happened to all the free market cheerleaders?  Are they vactioning this month?If the govt can do this, I’m not sure what can possibly be off the table in terms of govt involvement in the market and economy. 

And folks who wanted to privatize Social Security can take a break for the next 50 years or so. Times like these are exactly why SS is a govt program.

If I was a conservative opposed to some sort of socialized medicine, I think I would be in despair about now. Most of the arguments about govt screwing things up just lost their sting.

The problem is that AIG didn’t price CDSs appropriately (they vastly underestimated the risk of a downturn in housing prices), and (without the ability to borrow against its assets) finds itself unable to pay the insurance policies it sold.

In principle, the counterparties do bear some blame for not realizing the CDSs were underpriced and AIG was at risk of not being able to pay as agreed in a situation like this one. But they bear far less blame than AIG’s shareholders (who hired the management that underpriced the CDSs) and thus the cost should fall first on the shareholders.

The second half of that I agree with, in the sense that we think "have to" bail them out to avoid economic catastrophe.  The first half I couldn’t disagree with more.

They didn’t behave responsibly, and this is why we now have disastrous consequences from a housing downtown that we’ve experienced before in this country without such calamity.  The CDS phenomenon obscured the risk inherent in these investments, and induced the markets to collectively ignore the risks.

Risk is one of the "natural" regulators of markets.  Without that being operative, governmental regulation is needed.  

If we could figure out a way to allow the CDS buyers and sellers to fail without causing a depression, that would be the best outcome.

Among the management of trillion-dollar companies? I was never aware that it lived there.

Perhaps it was too big to fail, but the terms it got from the government were far harsher than the one’s it had rejected.

BTW, the assets of AIG are valued over a trillion dollars, so I think if it comes to a fire sale, the USG will be able to recroup its loan. AIG fell because of a liquidity problem, not a value problem.

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