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Required Reading: Obama and AIG

1:14 PM, Sep 17, 2008 • By DEAN BARNETT
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So what's the part that's in trouble? If you've sensed a pattern this week and already guessed it has something to with the subprime mortgage mess, give yourself a gold star. And maybe you should consider seeking the Democratic nomination for president in 2012. AIG also wrote de facto insurance policies for subprime mortgages and mortgage-backed securities for the banking community. What were they insuring? They were offering insurance against the possibility that the holders of those mortgages would default. Which as you know by now, they have. Selling such policies turned out be a very poor business decision.

Here's where things got potentially sticky - the American financial community has been planning on AIG making good on its insurance policies, sort of the way you expect Allstate to make good on your homeowner's policy when your house burns down. If AIG failed to meet these obligations, it would have been a devastating blow to the American financial community. "Devastating" in this context could have meant something like that bank run in "It's a Wonderful Life" on mega-steroids but without that annoying Uncle whose carelessness almost got George thrown in jail. The terms "illiquid," "insolvent," and "panic" would have received frequent use.

Contra Senator Obama, the government didn't bail out AIG because the guys at the Fed and Treasury wanted to do a solid for their pals at AIG. AIG got bailed out because its failure would have been catastrophic. Furthermore, the Fed's terms for the bailout were Draconian. AIG stockholders and executives aren't laughing all the way to the bank this morning. The company's CEO is gone, his departure a condition of the bailout.

I've written many times here that I believe Senator Obama is a fundamentally good man. This is an opportunity for him to show his qualities as a leader. It would be helpful if he would try to calm the markets rather than further agitate them. I wouldn't dare hope for him to express his confidence in the markets or the economy - since he obviously understands neither, such a declaration would ring hollow anyway. But since he doesn't understand the issues to such an extent that he's unwilling to take a position on whether or not the AIG bailout is a good thing, is it too much to ask for him to refrain from playing the arsonist?