Propping Up a House of Cards

Interesting article in this past Saturday's New York Times on the AIG situation. How greed and mismanagement brought down the world's largest insurance company and with it the western financial system. There is a good explanation on credit default swaps, the cancerous derivatives that have metastisized, leaving the U.S taxpayer is on the hook for trillions of dollars as a result.-Lou

Propping Up a House of Cards

......If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.

I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin....

Read Article Here:

http://www.nytimes.com/2009/02/28/business/28nocera.html?_r=2