One thing I found interesting when watching Congress grill Gietner and Paulson, was how little Congress really understood what caused this recession and how little Congress understood businesses, business law and corporate structures.

It was not hedge fund activity and ‘proprietary trading’ that caused this problem. It was poor mortgage lending based upon flawed foreclosure recovery models and flawed CDS premiums. Yet, instead of looking at making CDS(s) a true insurance product and requiring extra capitalization to cover potential losses when being the insuring entity, they look at putting restriction on banks that may fit the ‘too-big-to-fail’. This also ignores the activities within the Fed that may have put at least one healthy bank at risk by forcing it to buy out another. Congress also looks at ‘taxing’ the banks that may have made it past the initial problems. This penalizes banking entities that may have made rational decisions allowing them to survive. Note to Congress: We may still have problems with the hidden inventory that was caused by HAMP and all of the other restrictions placed on banks pursuing foreclosure.

Congress also didn’t seem to understand why the money to AIG was loaned to the parent vs just the insurance arm that handled CDS(s). The reason why you do this is so that AIG can’t shed their responsibility to the government money by shedding their subsidiary with the associated bonds. With the present structure, if AIG defaults on the bonds, the US government has the potential to own a good portion of AIG itself instead of just a problematic subsidiary. AIG has other parts of its business that are presently profitable.