Thursday, June 18, 2009

Brad DeLong and the fairy tale of Wall Street

This is a great read from Brad DeLong: A_Wall_Street_Fairy_Tale

I think it is also wrong in a solvency sense but spot on in a liquidity sense.

The Federal Government will lose big money on AIG - but the money lost - after all asset sales - is unlikely to exceed $300 billion. Huge money - but only about 6 months of pre-tax, pre-provision profits for the global financial market. And AIG insured the GLOBAL financial market.

An AIG failure would have made the crisis more difficult - but it fundamentally did not change what happened. The losses were HUGE - but the deepest part of the crisis was about liquidity. Nobody trusted any wholesale financed financial institution and they would have all failed without government support. With liquidity support (which has been forthcoming) the pre-tax, pre-provision profits are bailing out the banks.

If AIG had been let fail the losses would have been larger - but not critically so - and the government support would have been required for longer. But it would not have fundamentally changed the world.



John

PS. Huge losses are still to come - but so are vastly increasing pre-tax, pre-provision profits.

4 comments:

babar ganesh said...

phillip swagel (assistant sec to treas under paulson) in his memoir made it sound like the decision to save AIG was made by a bunch of tired people with no clear conception of what the consequences could have been for either a bailout or a non-bailout of AIG.

Anonymous said...

Would there have been a liquidity problem if the market had thought banks (etc) were, in fact, solvent?

/pecanpaj

shivz said...

Financial risks are uninsurasble, by CDS or otherwise. Ask any conventional insurer or reinsurer. Therefore, it should be prohibited altogether.
By the same token, packaging and repackaging of securities should be prohibited whenever assessment of risk becomes thereby impossible.

Barry said...

babar ganesh said...
"phillip swagel (assistant sec to treas under paulson) in his memoir made it sound like the decision to save AIG was made by a bunch of tired people with no clear conception of what the consequences could have been for either a bailout or a non-bailout of AIG."

Various media accounts have claimed that a very large proportion of the money paid to AIG went to Goldman Sachs. Paulson was G-S; IIRC, a direct rep from G-S was the only non-fed/government person there when the decision was made.

It could well be that the immediate concern was to make sure that the principal decision makers' hundreds of millions of $ in G-S were preserved.

-Barry

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