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Everyone is making a big fuss over the fact that AIG was used as the intermediary to bailout a bunch of other banks around the world.  Investors are acting very surprised about this news as if they didn’t know that the only reason AIG is on life support is because it has its tentacles wrapped around our entire financial system.  It has been widely known for months that AIG is getting money because they are so intertwined in other companies.  No one cares about AIG so much.  They are worried about the domino effect of letting AIG seep into the abyss.

Many people are saying that we should rescind the money or that this is completely illegal.  Those are reasonable arguments, but we all have to remember that letting AIG fail would have been completely catastrophic for our economy.  The entire financial system would have fallen off a cliff.  It’s very likely that we would have seen 5 or 6 of our largest financial firms fail in a one week period if AIG had gone under and while that is what the Darwinist nature of our market called for it would have been truly catastrophic.  This would have been the equivalent of letting nuclear bombs go off on every continent around the world.  We would have seen unbelievable outflows from anything involved in any firm on Wall Street and the system likely would have completely collapsed.  There would have been utter mayhem and a certain cease in all things economical.  I hate the fact that Goldman Sachs is trading at $94 instead of the $0 it should and would be at had the taxpayers not bailed them out, but I recognize the fact that these measures likely saved us from falling off a cliff last November.   Are all of our futures a little more secure because we did not let the entire system collapse?  I believe so….

And perhaps more importantly, we should recognize the impact of the AIG guarantee.  The governments bailout programs use the government’s power to tax to implicitly guarantee AIG and many other assets (such as MBS).  This means the assets are worth far more than they’re currently valued at.  The markets remain in turmoil, but these guarantees are a game changer for many different types of assets which are now government guaranteed assets that are trading like junk bonds.   Government intervention probably won’t resolve the crisis, but it will resolve the question over whether AIG and many other assets are worth pennies on the dollar….