They did make irresponsible trades. They just got luck the government bailed out AIG. Otherwise their bets go bad.
They claimed to have hedged themselves on a possible AIG failure. Don't know if it's true, but it's certainly possible.
Well, their compensation policy (aka bonus) encourages employees to take excess risks. You get bonus if your bet wins but you don't need to pay if you lose. Given the higher the risk, the higher the return, onaturally people will take excessive risks. In fact, by doing this, GS employees almost killed GS. But fortunately, GS also inserted people in the government, so they can continue to gamble as usual.
Depending what your definition of irresponsible trades, you can't do business based on the assumption of the guy you are trading with is going out of business. What you do is hedge your bets, but you don't stop trading all together. Unless of course you want them to stop being a financial company. If buying a CDS contract (insurance policy) from one of the biggest insurer in the world is making irresponsible trades, then I guess you buying stocks in GE or Cisco should be considered irresponsible as well.
I read the news today and I was thinking the same thing. How are they making all this money. While searching online, I found this excellent article http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine/1 . I thought it was a great read. I am not expert in any of this but what this guys was saying made a lot of sense to me. The article is bit long so if you want to get his main points, you can look at the videos at this link http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/print#
I don't know. But I studied Game Theory. The way incentive is set up is encouraging people to take excessive risks.
Actually you do need to take into account that your counterparty will go out of business. That's called default probability. The quants in i-banks use logistic regression to estimate.
Not any better than not being on any side. And who were their hedges' other counterparties? Surely not AIG or other troubled firms, right? When the whole system collapses - unless they were short the earth and long the moon - it's hard to escape unscathed. To that end, I've heard rumors that their ultimate exposure was a lot higher than they let on.
You mean they should not be doing any trading then? Just because there is a chance of the whole system collapses, people should just stop doing business altogether?
No, I'm saying what I said in my initial post: that your initial dismissal of their culpability/benefits from the bailouts etc on the grounds that they only had small direct exposure obscures the reality that their indirect exposure (and benefits) from the bailouts were both enormous.
