AIG Bailout Thoughts

The CDS market peaked at over $65T dollars.  The mortgage market is just under $11T.  That means every mortgage is insured an average of 6 times.  People with LOTS of money were betting the real estate boom would CRASH!  Do you think they influence the real estate crash at all?

Imagine if every car in America had 6 insurance policies on it.  Imagine people making money when another person gets in a car accident.  Do you think that'd influence people's behavior?  Do you think the people owning the insurance policies would try to cause car accidents?  This is essentially what has happened in the real estate market.

Now here's why the government's plan to fix it is flawed.  They are trying to prop up AIG who wrote the CDS policies.  Whenever a mortgage fails, there's an average of 5 insurance policies on it.  Yes, one failed mortgage equals paying 5 times it's value.  Wouldn't it be more cost effective to prevent mortgage failures?  Even if the government pays 100% of the mortgage it's cheaper.  The government could pay 100% of the mortgage, then issue a new one under Freddie/Fannie at a lower principle.  The plan would:

1.  Cost less than the current plan

2.  Allow the government to recover most of the cost over the life of the new mortgage

3.  Slow/stop the flood of foreclosures that are creating too much supply

4.  Benefit home owners instead of the banks that own the insurance policies