We all know that the government (Bush and Obama, Paulson and Geithner and Bernanke) have been secretly funneling our money to banks, insurance companies and hedge funds, here and abroad, by paying AIG's counterparties' CDS claims. Gretchen Morgenson 3/7/2009

The PTB claim it's all necessary, because otherwise, AIG will go belly-up and the global financial system will go feet in the air. But ---

Are da boyz being paid twice over?

Consider this argument from A Credit Trader's blog via Econbrowser.

It has been widely assumed that AIG's CDS counterparties, all of whom knew that AIG was hugely underpricing these contracts (that is, in the crunch they'd certainly go unpaid), were always relying on the government (the taxpayers) to pay these CDSs off. In other words they accurately predicted the government's future response to the failure of AIG, a financial firm which was too-big-to-fail.

But did they? Were those counterparties that confident of their political prognostication abilities. Probably not. Then, how do you insure yourself against AIG going under and not being able to pay on its contracts?

Buy puts on AIG or short its stock. And why shouldn't we assume that's exactly what these sophisticated counterparties (Goldman Sachs, for example) did. But that means they've already profited from those puts and shorts. They're being paid twice.

I'm enraged! How about you?