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Comment: Thank you for making my point

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Thank you for making my point

The Katrina thing was a situation where POLITICALLY-CONNECTED businesses got SPECIAL FAVORS from ... the GOVERNMENT.

What SHOULD have happened is that the insurance companies should have been forced into bankruptcy and their assets liquidated. Future insurance companies (and their investors) would then have to figure out a better way to contain risk.

What happens is homeowners reduce their risk by buying insurance. Then, insurance companies reduce their risk in TWO ways.

Most people know about insurance companies reducing risk by having a large pool of insured over a large geographic area. The problem is that state insurance laws make this difficult. These laws interfere in what would otherwise be a free market.

So, when something like Katrina hits, the "poor" insurance companies blame the state insurance laws (which they wrote -- cronyism) for preventing them from adequately reducing risk. It is the "old boys club" and keeps big insurance companies making big bucks.

But what is not talked about much is that the other way insurance companies reduce risk is through other means, such as re-insurance, credit default swaps, etc.. This is insurance for the insurance companies, junk bond companies, mortgage-backed securities buyers, etc.).

When the mortgage crisis hit, guess who was the largest issuer (on the financial hook) of credit default swaps for mortgage-backed securities? It was AIG. So, if AIG went under, so would a lot of other companies. (They SHOULD have gone under, and in the future the risk would have been spread even more so that not just one company could monopolize this maket.)

And guess who AIG's biggest customer was? Goldman Sachs. So, AIG got bailed out partly to save them and also largely to save Goldman Sachs, whose executives run the government's Treasury Department and influence the Federal Reserve.

So, it is the POLITICS that causes these cronies to get away with things.

It is not the corporations, and certainly not the investors who bought stock in all these companies thinking they were solid investments. If these companies were allowed to fail, then investors would start looking for more protection. But because of the bailouts, you get the moral hazard.

The Congress has no constitutional authority to do what they did. And THAT is the problem.