Sunday, March 29, 2009

The AIG Mess

The reason we have bankruptcy reorganization is to allow the orderly unwinding of inefficiently employed corporate assets while allowing the continuation of business.

The U.S. government made two massive errors that contributed to the current mess. By walking away from Lehman Bros without enabling the company room to reorganize, and by not using the reorganization laws to force AIG into bankruptcy reorganization, before pouring billions into the company, the U.S. government sent conflicting signals about its competence in dealing with the financial crisis.

The crisis of confidence resulting from the failure of Lehman Bros sent a contagion throughout the banking system, so that the subsequently continued bailout of AIG served to feed the fear. The treatment of AIG officials, notwithstanding the latter's lack of good taste, destroyed any remaining confidence in Congress; who rather than deal dispassionately with the problem, seemed more interested in grand gestures, to the point of passing unconstitutional legislation.

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