AIG - Holy Moly

I am stunned, STUNNED at the news that the U.S. Federal Reserve and U.S. Treasury have kicked in US$85 billion to bail out AIG.

Just 48 hours after insisting that a bail out of Lehman Bros. was an absolute non-starter, Henry Paulson pulls a COMPLETE 180, and coughs up the cash to save AIG. The reason, apparentlly is pure pragmatism. Lehgman was allowed to fail because it could be allowed to fail. they made a calculated decision that Lehman was not big enough, or important enough to actually spark a market crash, and sure enough, this week’s modest sell off on the Dow proved them right. but they decided that AI with its $1 trillion in assets, and almost $30 billion in counterparty risk, would have brought worldwide trade in derivatives to a standstill and triggered a real, live old-fashioned freak out. And so, Uncle Sam bails the kids out of the drunk tank again.

Amazing. Absolutely amazing.  I never thought I’d see the day when the U.S. government essentially nationalized a major private company for the sake of minimizing fallout int he capital markets. I guess the Republicans just really really didn’t want a Black Monday in the middle of an election campaign.

That said – I can understand the dilemma Paulson is in. to fail to save AIG may well have triggered a huge market sell off, possibly global in nature, and it may well have brought lending to a halt and driven rates through the roof. Bad mojo all around.  But the precedent is just incredibly, staggeringly bad for the separation of government finances from private enterprise.

Mr. Paulson, GM and Ford are on the line, they have an urgent favour to ask.