How the Masters of the Universe got that way

By Michael Fraase

Tuesday, 11 November 2008 09:18PM CST

Section: Business

Freakout dollarLast September, the US Federal Reserve Board bailed out American International Group (AIG) to the tune of US$85 billion. In return, the US citizenry received 80% of the company. This was one of those “too big to fail” deals.

Here’s how the New York Times explained the reasoning behind the bailout:

“If AIG had collapsed—and been unable to pay all of its insurance claims—institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with AIG securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.”

Um, isn’t that how it’s supposed to work? When you make a bad investment, you take the loss—you can bet your ass that the individual AIG investors have already taken their losses. Insurance is another matter entirely of course, but as the Times stated, there are protections already in place for AIG policy holders. Because the value of investments in AIG are not being reset, the Federal Reserve has done nothing to prevent this from happening again. Worse, there’s nothing being done to address the “too big to fail” issue. If an entity is too big to fail it’s too big to exist. Pretty simple—not exactly rocket science.

Oh, but we’re not done yet. Not hardly.

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