Monday, March 2, 2009

Today's Mess

Continuing the theme of oracles, Joe Nocera seems to have done a fairly good job of prediction in his Talking Business column for Saturday's New York Times:

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions.

Sure enough, this morning my Google Reader abounds with headlines about that "sorry status" of A.I.G. and its desperate need for more bailout money. I suspect Nocera takes little satisfaction in the thoroughness of the analysis in his column, which was assembled under the dire headline "Propping Up a House of Cards." Ironically, much of Nocera's effort to reduce this mess to terms that we could all understand was assisted by Robert J. Arvanitis, who has been all too willing to facilitate explanation from his vantage point as a former A.I.G. executive. The resulting analysis is fascinating. To appeal to Nocera's metaphor, every "card" in the "house" ultimately involves a violation of Warren Buffett's little witticism about "geeks bearing formulas." It all came down to investing heavily in instruments understood so poorly that they have yet to be managed by a suitable regulatory framework, all on such an enormous scale that Nocera concluded:

It would be funny if it weren’t so awful.

The final blow, however, came when, in search of a good coda, Nocera returned to Arvanitis for his insider's point of view:

I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Now we the taxpayers are reading about it in this morning's headlines.

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