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November 12, 2008



I think the key to understanding the "why" of this specific bailout (and bailout II) is the first part of the first sentence:

"Banks in the U.S. and abroad..."

Banks in Europe were some of the biggest customers of AIG's insurance. I suspect the US Govt wanted to do everything in its power to make sure that problems at AIG would not be the cause of problems at European banks. The European banks may have ended up with problems, but at least no one can point the finger at AIG as the direct cause -- as many folks are doing with LEH.

Of course, since US banks were involved in this process with AIG, they also benefit from any help AIG gets. The nature of the beast.


Just to add, keep in mind that part of the rationale behind these rescues is to re-instill confidence in the financial system. I think the last thing the US Govt wants is for other countries to doubt that we will honor our obligations -- even if they were made irresponsibly by a private company. In this case, since many of the key counterparties to AIGs derivatives were significant European financial institutions, no doubt that weighed heavily on the US Govt's decision to intervene.

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