One of the most aggravating things about the AIG mess is how the bailout is rewarding counter-parties for irresponsibly running up huge exposures to the failed insurance giant. The market works quite well when a type of financial Darwinism is encouraged, with firms that entrusted capital to failed enterprises taking losses and firms that avoided those investments gaining a relative advantage over rivals.
Now we’ve turned around that dynamic, rewarding AIG’s counter-parties and dealing a relative penalty to those who weren’t exposed to AIG. Remember, these AIG counter-parties got financial products priced at market rates and are now being treated as safe as if they had bought US Treasuries. We’re allowing a huge arbitrage profit to be delivered to those who smartly bet that AIG was too big to fail.
When watch AIG’s old advertising campaign–the one where troubled kids worry about the finances of their families but get reassured by parents who explain everything away by saying “We’re with AIG”–we can’t help but feel like the parents were the irresponsible banks and hedge funds. The secret coda here is “We’re with AIG, and AIG is with the US government.”
Anyway, here’s one of those damn ads.