"A Wall Street Fairy Tale"

Great read from Brad DeLong A Wall Street Fairy Tale

"When American high finance hedged its mortgage risk by buying derivatives from AIG, it did not perform due diligence to figure out if AIG could in fact meet its obligations. This failure cost American high finance an amount that may ultimately reach $300 billion. And it would have been fatal had the government not come to their rescue.

Had the government stepped in by discounting AIG paper in return for warrants and notes at fair market values, the banks' life support apparatus would have been obvious. It is only because the government stepped in by nationalizing AIG and guaranteeing its debts that American high finance now has healthy stock prices, and that the senior executives of the big banks—except Citi, Bank of America, Lehman, and Bear-Stearns—are congratulating themselves for their skillful navigation through the crisis."