> Why shouldn't they lose money for taking bad counter-party risks? I don't really know how else to explain this. They shouldn't lose money for taking counter

> Why shouldn't they lose money for taking bad counter-party risks? I don't really know how else to explain this. They shouldn't lose money for taking counter party risk...because they were willing to pay the price to insure themselves on the counter party risk. Why do you keep insisting that they need to lose money? They had 7.5 in collateral, and they insured themselves for the other 2.5 in the event they defaulted. This is the definition of protecting yourself from bad counter-party risks. > They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly? ...because they insured themselves. Imagine someone who bought a share of Google stock and then also bought a put option on it to protect themselves. Then the stock goes down. It's like asking why that person shouldn't take the hit because they were going to keep the money if Google had gone up. Goldman doesn't take the hit because 1) they were prudently collateralized and 2) they PAID for CDS protection on the rest that was owed to them that was not collateralized. CDS is not free, of course. If they were willing to pay the insurance and demand collateral, why should they have to take a hit at all? > I'll pay $7.5B for $10B. So would I, but this is obviously a mischaracterization. It's like a homeowner who defaults on their mortgage and gives a house worth 250k to the bank who lent them 500k to buy it. They are not "paying 250 for 500". > Maybe, maybe not, but in any event, not by the US govt. This is not really a maybe, maybe not situation. Clearly with the collateral and insurance arranagements, Goldman would not have lost money as a counterparty to AIG. If you have an explanation otherwise I would be interested to hear it.