Thursday, September 18, 2008

NPR explains AIG

You know I listen to way too much commercial radio--so you don't have to. But when you really want to know about something complex, you usually have to turn to the noncommercial dial.

But, with all the talk about AIG's failure and the government bailout, I heard no one, until today, explain what AIG did wrong.

Finally, on Morning Edition, NPR economic expert Adam Davidson explained that the problem was AIG's fairly recent entry into bond default insurance, which it began a decade ago. The gist of it is this 70 trillion industry covers banks when bonds default, called credit default swap.

And unlike, say, when a house burns down and it doesn't mean that all houses in the area burn, when a bond fails, it shakes confidence in bond buyers and many fail together. Thus, AIG, which started this often cloaked level of insurance, takes a big hit.

The global economy is based on banks lending each other money all over the world, and if their insurance policies don't pay off, the system could seize up. That's why the government was compelled to help AIG.

This is the first and most clear appraisal of the current economic crash that I've heard. You can catch more at NPR's Planet Money blog:


Kevin said...

Fresh Air with Terry Gross about AIG et al.

Lou said...

Back in May, Adam Davidson also collaborated on a special episode of "This American Life" called "The Giant Pool of Money," which was a very interesting explanation of the subprime crisis. I wouldn't be surprised if they re-aired it in the near future. The archived episode is available here.

Paul Dreyfus said...

Agreed about the Fresh Air interview with Michael Greenberger. You can listen to the whole interview at

And I wonder how come no one seems to be asking very loudly: If we are going to bail out the financial institutions with out tax dollars, what do we get out of it? We need to be paid back, with interest

Paul Dreyfus said...

Check out the whole Greenberger interview at

And then, we all need to ask: If we are going to use tax $$$ for this bailout, shouldn't we be repaid, with interest? And get some control over this in the form of regulations so this does not happen again?