tag:blogger.com,1999:blog-4900303239154048192.post1847534154817159041..comments2024-03-06T06:34:42.881-05:00Comments on EconoSpeak: Why AIG Must Be Bailed OutUnknownnoreply@blogger.comBlogger3125tag:blogger.com,1999:blog-4900303239154048192.post-44462329857116373282008-09-17T17:01:00.000-04:002008-09-17T17:01:00.000-04:00The free world is saved. Nicely sarcastic is my gu...<I>The free world is saved.</I> Nicely sarcastic is my guess (which is not a bet). <BR/><BR/>Robert, yes, the rating agencies definitely played a role. Did they not admit to an inability to accurately measure risk in e.g. CDOs (even as that portion of their business became the most expansive)? Or at least that's my recollection from the Mason and Rosner paper and/or perhaps others.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-43424342802911405102008-09-17T09:12:00.000-04:002008-09-17T09:12:00.000-04:00Much of the insurance that has been issued over th...Much of the insurance that has been issued over the past decade or so was as a substitute for due diligence.<BR/><BR/>Municipal bonds are a simple example to follow. In order to sell the bonds, municipalities need to get them rated. This is expensive, so as a cheaper alternative they buy insurance instead. The insurance company thinks it is getting the premium for nothing, since such bonds seldom fail, and uses the income stream to invest in more risky areas.<BR/><BR/>The bond buyers are now not taking on the risk of the municipality, but of the insurance company. No one knows the risk of the bonds since their was no due diligence.<BR/><BR/>Extend this scheme into many other areas and you see the problem. If the insurance company folds, then the bond holders have to be made whole is some fashion. That's what the Fed is trying to avoid.Robert D Feinmanhttps://www.blogger.com/profile/11811511835460945217noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-15434533056006657682008-09-17T05:54:00.000-04:002008-09-17T05:54:00.000-04:00The FED did close the deal. The terms of this dea...The FED did close the deal. The terms of this deal will likely be closely scrutinized. DeLong has already picked up on the interest rate. LIBOR plus 8.5%. Now there's a premium for default risk!ProGrowthLiberalhttps://www.blogger.com/profile/17138489390594441753noreply@blogger.com