The Poor Workman Blames His Tools

It was recently disclosed that a lot of the government money given to A.I.G. ended up in the hands of Goldman Sachs. Reuters has 10 questions for Goldman Sachs (and GS' "answers"): "The majority of Goldman Sachs' CDS (credit default swap) exposure to AIG Financial Group was collateralized. That means that Goldman Sachs had collateral."

None of this is a surprise - in fact it gets at the heart of why A.I.G. continues to be propped up. Other institutions bought insurance from A.I.G. and their continued survivial depends upon A.I.G. being able to pay. As I blogged a few months ago, a typical CDS transaction has a built-in collateral call when either the underlying obligation or the insurer runs into financial trouble. What this means in practice is that both A.I.G.'s precarious financial state and the collapse of the ABS market translate into an ongoing obligation for A.I.G. to shovel money to the parties who bought the CDS'. A.I.G. was the only player in the CDS casino dopey enough to place bets in only one direction.

If A.I.G. is just a funnel the government uses to keep other instituitions afloat I think it is reasonable to ask why something else won't do just as well?