First let me say I loved this issue and recommend anyone who isn't subscribing yet should buy this single issue for a couple of bucks and give it a try. The new timelier LBO not only comes out faster, but reads faster so you can zip through it on the screen in Adobe viewer. It's like a deeper and more elegant blog.
Okay, here's my question about one tiny thing in passing. You chastise Treasury for not making AIG's counterparties take haircuts. But I'm not sure how this would have been possible since default insurance is essentially haircut insurance. If we made Goldman accept 65%, then we, as AIG, would have to give them 35% more in insurance. (Which is pretty much exactly what happened; it's adding the 2 sides together that gives you 100%).
If we-as-AIG didn't cough up the 35%, then AIG would be in default, with all the death spiral dynamics that would follow it. (Most importantly a default to one creditor would have lowered AIG's rating, which would have trigger massive stump up on all outstanding contracts -- money we as the govt. would have to lay out or all other contracts AIG held would immediately default.)
If we wanted to go that route, we didn't have to seize AIG. It could default all by itself. But having decided we couldn't let the contracts default, I don't see how the result can not add up to 100%.
I'm all for taking it out of the bank's hide, but it seems to me it has to come from another part of their body.