Bankruptcy, of course, didn’t happen. On Sunday, March 16, 2008, J.P. Morgan agreed to buy Bear in a government-brokered deal to which the feds contributed guarantees of $30 billion (later reduced by $1 billion). And two weeks later Geithner appeared at a Senate hearing to explain this huge intervention (well, it seemed huge at the time). He didn’t talk about the overnight loan market. He stressed instead that bankruptcy for Bear could have led to the “sudden discovery” by its derivatives counterparties that hedges they had put in place to protect themselves were wiped out. The prospect, he said, would then be a “rush” by Bear’s counterparties to liquidate collateral and replicate their hedges in already fragile markets. Derivatives, in other words, had changed Bear from a broker-dealer that could have been simply the latest name on a Wall Street tombstone to an entity that the government needed to save because it was too interconnected to fail.
That dread epithet could be applied in spades to AIG. On Sept. 16, precisely six months after Bear’s rescue, AIG’s board called in lawyers and prepared to file for bankruptcy. But, as the whole world knows, the government stepped in to save the company, eventually committing $180 billion to keeping it solvent.