The Gold Standard  

The main problem with this story is that this does not confront the question of what would have happened to the financial system globally had Goldman Sachs been allowed to take its loses on the CDS it had bought from AIG, if all that they are trying to prove is that the AIG bailout was a bailout of Goldman Sachs. The global financial system would have melted donw had Goldman gone down. Such was and is GS’ reputation and that is the truth. If Paulson openly came out and says that he bailed out Goldman because he wanted to avoid a systemic meltdown globally, he would be saying the truth.

Of course, why AIGFP posted a collateral when other monoline insurers did not and why AIGFP was not regulated are ex-post arguments. They were true even before the crisis broke out. Before the crisis, no one bothered.

The real story is what they say: the AAA rating that the senior tranches of the CDOs got duped/dulled/lulled AIGFP to issue countless CDS (more than the value of the underlying CDOs in the first place) to all banks and to agree to post cash collaterals.

Neither the CDS sellers (AIG) nor the banks believed – when they first entered into these transactions – that anything remotely resembling 2008 meltdown would happen.

That, in turn, was due to far too many loans, far too many bad loans, far too many securitized instruments on thse dodgy loans and far too easy top credit-ratings. The credit-rating agencies were the only ones that had a macro overview of what was going on, in the whole industry since all came to them for ratings.

They should have seen the total volume of CDOs (and CDO*2) that they were being called upon to rate, in relation to the pool of underlying mortgages and the rising proportion of sub-prime mortgages in relation to total mortgages and the rising proportion of sub-prime mortgages in the CDO mortgage pools.

The real scam, therefore, is why are these rating agencies still around and why this industry is not being thrown open to more and why do they still enjoy quasi-statutory status?