Published at Financial Times | September 17, 2008
After US Treasury Secretary Hank Paulson’s brave stand on “moral hazard” at the weekend, it took less than 48 hours for pragmatism to prevail over principle in the form of a government rescue for ailing insurer AIG. For all the hand-wringing of the “no bailout” proponents, the takeover was almost certainly necessary, given the potential for significant contagion via the unwinding of complex counterparty exposures.
With the demise of AIG, the markets’ verdict has been rendered: a reactive, ad-hoc, mostly private sector approach to the challenges of the financial sector will not work. The problems are systemic and the remedies need to be comprehensive. The challenges – including a shortage of capital, dysfunctional wholesale credit markets, widespread de-leveraging and significant asset sales – are too large, too widespread and too complex to be managed by the private sector alone.