Wednesday, September 17, 2008

Bank Note

A brief note about the Fed's AIG bailout, and the financial meltdown in the US: Suppose I'm a hedge fund manager who wants to get rich in a bear market. In the wake of the AIG bailout, why wouldn't I short the stock of some investment/insurance house that's, like AIG, wrapped up in CDS, and that's, like AIG, "too big to fail." I continue shorting until the stock tanks, which causes the firm's credit rating to drop, which in turn cripples the firm's ability to raise capital. With the stock in the toilet, credit unavailable, and with CDS coming due, the firm can't remain solvent, so it turns to the US government for assistance. The US government bails out the firm, wipes out the shareholders, and I get rich. So, tell me, why wouldn't I do this?

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