Rotten AIG

The government is shoveling more money into the maw of AIG. The Times' Joe Nocera explains that this is really a bailout of the banks that purchased insurance in the form of credit default swaps from AIG. Its all about the "systemic risk." On his blog, he writes:

[T]he reason A.I.G. is being propped up is that the government fears that if the company defaulted the counterparties would suddenly be faced with tens of billions of dollars worth of unacknowledged losses — and they would go bust. It would make the Lehman fiasco look like a garden party.

He explains further in this column. The Baseline Scenario has a chronology of AIG's bailouts, so far. See also Felix Salmon, Justin Fox.