Contrary to popular belief, which blames the global financial crisis on subprime borrowers, it was the derivatives, based upon the likelihood that those borrowers would pay their debts, that were the primary catalyst triggering the global economic crisis of 2008. Back then, the derivative obligations of AIG (AIG) imploded the insurer. Under the pressure of fear-mongering from the Federal Reserve and the financial industry, the U.S. government committed hundreds of billions of dollars to bail out AIG's counter-parties, including the biggest banks of Europe and America. Had the government not stepped in, virtually all the banks on Wall Street would have gone bankrupt. A host of European and Asian banks would have followed.
AIG was not FDIC insured. It could have been allowed to fail, and should have been allowed to fail. All the banks on Wall Street that would have failed should have failed. Their speculator counter-parties should have been bankrupted, and their retail depositors should have been made whole. The retail divisions could have been temporarily nationalized and sold off as soon as possible to more prudent management. Had this occurred, America would have experienced a deep but very temporary economic downturn, and, by now, the downturn would be over. But, with derivatives obligations tied intimately with FDIC insured depositary units, the debt will need to be paid by the government, as a matter of law. We will have no legal choice except to default, or pay them off.
