In an alleged free-market economy, how can one company's failure take the whole world down with it?

[marmar]

If it's too big to fail, it ought to be nationalized......

[valerief]

1. It's a scam. The rich are stealing more money from the Treasury. nt

[malaise]

21. The Treasury?

These fuckers looted the planet.

[daninthemoon]

2. my 2 cents: connecticut banking family gains presidency and 8 years

later: the country gives the banks the last few bits of borrowed money that was available. Any questions?

[notesdev]

3. For starters, it ain't free

but the key element in the AIG scheme was risk.

You see, most traders and investors - the ones who know what they are doing, anyway - when they take a big position, they take a smaller position on the other side of the bet, called a "hedge", so they don't lose everything if the main position is wrong. Thus "hedging a bet", "hedge fund", etc.

AIG set out with what appears to be a deliberate strategy of using blackmail and extortion against the US government as their hedge - in other words, it was part of the plan that if they went down they would take everyone else with them.

Everyone who approved and furthered this financial strategy belongs in jail and terrorism charges should be seriously considered in addition to the slam-dunk RICO and fraud charges.

[DLnyc]

17. Perhaps it's a little more complicated than that. The banks apparently were

complicit -- AIG gave them cover to claim risky assets were worth much more than they really were.

[notesdev]

18. That too is an important aspect to the problem

That's a DIFFERENT crime than the one I was describing, but that is also true. And in that case we also have the willing complicity of the Federal Reserve, who could have stopped it with a mere memo, but chose to allow the regulation-evasion scheme to continue.

But what I am describing here is something separate, a massively irresponsible risk-taking. What a responsible company does is to hedge its risk - and AIG being in the insurance business, it surely knows the importance of having such a position just in case - that's what all the people who bought the CDSes from them were doing. AIG clearly felt that its insurance was the threat of collapsing the global financial system and the ability to blackmail for bailouts.

[DLnyc]

19. Yes, if I went out and sold several million dollars worth of fire insurance,

without even attempting to set aside funds in case of a bad fire, I would end up doing 10 to 50 in Leavenworth.

But AIG whiz-kids, apparently, sold several trillion dollars in insurance on something a hell of a lot more prone to 'correlated failure' (i.e. large numbers failing at the same time), namely mortgages derivatives(?), without really putting aside any funds for payouts. Logically, those kids should be looking at 30,000,000 to 50,000,000 in Leavenworth.

Still, it looks to me like the banks showed pretty deliberate obliviousness to the fact that the scale of insurance that was out there was way too massive to be really backed by any real-life entity. They did this, if I understand correctly, so that they could count their 'insured' instruments as much more valuable than they really were, thus allowing them to leverage more capital which they could put into more 'insured' instruments which . . .

[omega minimo]

4. It was a House of Credit Cards

[Double T]

5. Many large corporations are too BIG to exist. As M & A activity continues..........

there will be more and more corruption in all sectors.Monopolies aren't good for anyone, including the monopoly itself.

[sicksicksick_N_tired]

6. Who and what defines free-market?

That's all.

[RB TexLa]

7. We have a regulated free market or the government would have let it fail

along with GM, Chrysler, Citi and whoever else didn't make it. There also wouldn't be any trading halts when the markets drop by x%, there would be no anti-trust regulations, no FDIC so on and so on. Laissez-faire is brutal. It's kind of like opening about ten futures contracts with no stop loss or limit, leaving the computer for a day and then logging on to see what happened.

[jwirr]

8. Usually they would not be able to but AIG was insuring the risks that

the banks were taking so when the jig is up and they do not have enough money to pay for the failures the whole house of cards come falling down. Many of these companies are multinational companies so the whole world is involved. So because a bunch of bankers are insured they take risks and because the insurer doesn't have the brains to say no to these risky ventures we the people get screwed. And it appears that even with the money they are going to fall (AIG).

When a hurricane hits in Florida or New Orleans they tell the home owners they will not continue to insure homes in dangerous areas but when some hotshot wants to gamble on a risky business venture no one says NO.

[originalpckelly]

9. Very true, but the opposite is needed.

Nationalization just lobs all the crap together in a government monopoly. We need anti-monopoly stuff, to break up the monopolies/oligopolies.

[serrano2008]

10. Which "one" company failed?

Seems like there are a bunch of them failing, so blaming AIG for the whole world economy being down seems kind of inaccurate.

[Fire1]

11. Because it's a global enterprise with international interests.

They don't exactly take the world down with them but these countries invested in the derivatives market with AIG and the value of the assets underlying the credit default swaps they invested in deteriorated (due to mortgage and credit meltdown)and those losses had to be paid, according to the cds contract provisions.

[specimenfred1984]

12. Please do not think out loud or dare to question our propaganda overlords

Repeat after me: Freedum Freedum!

[rhett o rick]

15. At some point there will be nothing more they can do to us. They have bleed us dry. They are about

done with us.

[yodermon]

13. If it really can "take down the whole world", then it *is* a De FACTO government *anyway*.

We've been in a for-profit corporatocracy for quite some time.

[rhett o rick]

14. We are seeing the capitalism end game. The pyramid scheme has to end in a crash.

Obama can't stop it, he might postpone it.

[Jim Lane]

16. The free market COULD sort it out -- it would just take a while.

And while the market was reaching a new equilibrium, there'd be a horrific human cost in lost productive capacity.

The whole episode demonstrates that, despite the rhetoric about the sacred "free market", that goal isn't actually as inviolate as it's often presented. Years ago, someone said (wish I knew whom to credit): "What the Congress wants is vigorous and effective competition that does not, however, result in anyone being driven out of business." That contradictory ideology is still in place.

I believe our basic setup is sound -- we have welfare-state capitalism, in which the economy is primarily a free market but the government intervenes to regulate business to some extent, provides some public goods (education), and counteracts the worst inequality effects of the free market. The problems are (1) the mixture has too much capitalism and not enough welfare state (e.g., we should have socialized medicine as we do education), and (2) the political power of big business means that the government often mitigates the effects of the free market by intervening on behalf of the rich. The latter point has been seen most vividly in the last half-year, but it's not the first time.

[MadMaddie]

20. If you haven't read Naomi Klein's "Shock Doctrine" you should

Everything that is happening to America has happened before. This is because of the Republican obsession with Milton Friedman's free market theories. They have destroyed many countries with the Shock Doctrine and Free Market bullshit.

[malaise]

22. Ding ding

We have a winner