Dave Reithel,

Thanks. I’m wondering if pronunciation of the company formerly known as “L-whatever” will become a sort of cultural identifier along the lines of of “nuclear” for example.

Interesting table of contents.

Observations:

Hank keeps saying this isn’t a solvency problem but rather a liquidity problem. If that’s the case, however, I think that the private sector would be happy to arrange a high-priced bridge loan to help them out. I suspect that private parties have backed away because they think that AIG has not just a liquidity issue, but a solvency issue as well.

Greenberg was also saying that AIG was a national treasure and that it was in the nation’s interest to save the firm. I think he’s got it backwards. I think AIG is a national abomination and it’s in the nation’s interest for it to fail as a lesson to others who might follow in AIG’s reckless footsteps.

Seeing as Greenberg’s paid millions over the years to lawyers to lobby Congress for reduced insurance regulation, it’s the height of irony that he now comes a begging to the government for a rescue. I say, let it go down. Someone might actually learn something from the lesson.

I saved (from 4-20-08) ‘eight hundred years of financial folly’ by Reinhart/Roghof, which I thought was very good…The paper contains links to other works along the same lines. After study I see no reason that well educated US economists would not realize the outcome of long term indebtedness to other soverign nations…But, as you know, one definition of insanity is ‘doing the same thing repeatedly and expecting different results.’

Thanks for your good work on Naked Capitalisim. I thoroughly enjoy you selection of financial news, your insightful comments, and the majority of comments by others.

http://www.nakedcapitalism.com/2008/04/eight-hundred-years-of-financial-folly.html

River

There was an excellent paper by George Akerlof and Paul Romer which described "bankruptcy for looting" and used the S&L crisis as one of four examples. Unfortunately, not free online and I have been unable to locate my copy (hint hint for anyone reading who has it). Abstract:

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

‘Too big to fail = Big enough to extort the government.’

River

Revenge of the nerds – Heisenberg’s Uncertainty Principlel.

Add that the investments are interconnected and held by State funds,
mutuals funds, world funds and funds period then the whole stock market
melts down together along with international markets because no one
knows what the true values are and therefore no one can be trusted to
make good on the investments…..default….turns to liquidation.

It seems to my untrained eye that this may be one of the key points: due diligence is impossible because only a team of string theorists could come up with a figure, which would be as verifiable as String Theory itself, meaning not. Is XYZ worth $100bn, $10bn, -$300bn? Who could say? Is that what killed Lehman [which in German would I think rhyme with redman, more or less, and certainly not rayban], that no one could price it with any degree of confidence?