[nandan]

Interesting. Although how much of this debacle can we attribute to conscious thinking along the lines of "we know this is high risk - high reward stuff, but let us do it to a point till we are too big to fail"?

I am more inclined to think this is a structural phenomenon - something that occurred because the incentives available at each step along the way were structured in a manner that allowed this to snowball.

[jordanb]

I think Goldman ignored the counterparty risk they had with AIG because they knew it was systematic, and that the government would bail AIG out and protect them.

I think that the stage for this collapse was set with the collapse of Long Term Capital. That's when all the banks learned that if the bets were big enough, they couldn't lose.