What I can't figure out is how AIG convinced the Federal Reserve to print up and given them Eighty Five Billion Dollars. Okay, granted printing wasn't actually done, they just electronically increased the money supply by Eighty Five Billion and transferred that to AIG. It seems to me that the Fed is aware of big finance, so AIG's business operations are at least are on their radar, along with major banks and other financial institutions. From what I can tell, AIG talks to the Fed over the years, says, "Yep, business is good. Our bonuses are nice and fat, and we are making giant piles of money. Our risk is minimal, since we only work in highly rated debt instruments. We'll let you know if we see any problems."

Some folks may have said something about capitalization, over-leveraging. The phrase: "Financial Weapons of Mass Destruction" may even have been used. But the people saying that sort of thing were clearly alarmists that didn't understand the markets very well, like, well, like Warren Buffett. Capitalism dictates that a business will act in its own self interest, but take into account risk because of a fear of failure. De-regulation along with a corresponding lack of transparency and flat out malfeasance (here I point at the ratings agencies) disguised as "quantified risk" using exotic mathematical analysis that was clearly self serving and poorly critiqued/understood.

And so, one day AIG realizes that things are about to get bad for them. Bad to the point of bankruptcy, and they call their friends at the Federal Reserve. (I'm not sure just how chummy these people are, but that will be a subject of a different analysis). They do realize that they will be asked questions, so they set up a report detailing just how bad it is. The so called "Doomsday Report."

I figure that it went sort of like this.

AIG guy (AIGG): Hey, Federal Reserve. You know how we talked about how we are doing well, and making all sorts of money since we only insure those highly rated financial instruments? Well, looks like we made a mistake.
Federal Reserve Guy (FRG): Hmmm, well you are calling me now to tell me about it, so it can't be good. But really, how bad could it be? I mean, it's all low risk stuff.
AIGG: Listen, I just sent a report over to you. I think you should read it and then call me back. But you remember what happened with Lehman Brothers? That was nothing.
FRG: What? Dude, send me that report.
AIGG: The courier is in your lobby. Listen, be careful with that report. If it gets out, who knows what will happen. We kept it short, but you know who's who, and what's what.
FRG (a bit angry now): Fine, I'll call you when I'm done reading.

The FRG reads the mysterious Doomsday Report, and realizes it is in fact really bad.

FRG (shaken and scared): AIGG, man, this is really bad. What the fuck are we going to do now?
AIGG: You read the report. You have to get us a big pile of money, and fast. You have the numbers.
FRG: How could you let this happen man?
AIGG: Hey, everybody was making money, everybody was making big bonuses, and those ratings guys and quants said it was all safe. You knew that.
FRG: I trusted you man. I've got a lot to keep track of. Geez, how could it get this bad so fast?
AIGG: Listen, we played the game, we made the political contributions, and everybody was making money. This isn't about me. I mean, you know I have plenty. But this is bigger than either of us.
FRG: Listen, I have to talk to the rest of the Board. We'll have to tell the President if we do this
AIGG: Yeah, I know. But you can't let too much of what's in that report out you know. Otherwise it will still be bad.
FRG: Yeah, but bad for who?


I don't know if this alleged report exists, but something like it must. A detailed investigation of this report and others would likely paint a much clearer picture of the mistakes that were made, and potentially the crimes that were committed, as well as who would be impacted by AIG bankruptcy. The fact that no prosecutions seem to be underway, and there has yet to be any discussion of significant detailed legislation on how to ensure no repeat of these problems, while public moneys are transferred to ensure the continued well being of those that have created the problems have the option to continue along the path of moral hazard that we have allowed because of the bailout.

The more I look into this, the more sense socialists make, and that is kind of scary. Of course, what is going on here isn't what I think of as capitalism either, but arguments are often full of false dichotomies. What can you do?