Because no government in the world has the guts, or the wherewithal, to actually make good on those hundreds of billions in insurance against the worst investments in the history of the world, our government is trying to finesse the deck by doling out a fraction of the money (still a shockingly huge figure) in the hope that if we can keep this Titanic company afloat for awhile--the ship will eventually right itself as the economy recovers.
Ostensibly, this is being done because if A.I.G. does not pay-off the financial institutions holding these now worthless mortgage securities, those companies will become insolvent. This, it is argued, will in turn set off a string of banking failures causing the situation to become much worse than if we simply said good-bye to A.I.G. The Domino Theory, redux.
When one drills a little deeper, we are told that there may be some light at the end of the shaft. You see, as time goes by, many of these contracts will expire, and the exposure of A.I.G. will diminish. From being on the hook for, lets say, six hundred billions, they may be able to reduce that figure to a more manageable, and politically correct one of, let's say, one hundred to two hundred billions. That's a pill the politicians may be able to make us swallow.
I submit this today to the intelligent scrutiny of my friends at OpED, not because I am qualified to offer an opinion on this aspect of the bailout; but because it has raised questions in my mind which I do not fully comprehend as yet, and I am interested to see if anyone at this site can offer me a cogent answer.
What happens if this strategy succeeds, the contracts expire, and A.I.G. is off the hook?
Who is going to pay off on all those rotten certificates when they are no longer insured? (Hedged) If the idea is to prevent the banks from failing by enabling A.I.G. to cover their losses, how do we benefit from helping A.I.G. to crawl out from under those obligations? Aren't we just pushing off for a year or two the very failures we are now shelling out to prevent? What am I missing here?
Because this situation has never happened before, nobody actually knows what they are doing. Every solution proposed is strictly theoretical. Needing a precision strike, we find ourselves not in the laboratories of NASA, but on the sands of Kitty Hawk with our fingers crossed.
What we have is a stall: Delaying tactics, a rearguard action. But when you are up in the air, as we are now, a stall, as the Wright Brothers learned, can be very dangerous. The money we have advanced A.I.G. may keep it aloft for awhile, but when it comes back to ground, who's going to rise up all those now clinging to its wings?
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