Great Article on How Timmeh Blew It,

here. A few choice 'graphs (if you're not quite sure why it's the credit derivatives that mattered [and still matter] most [as opposed to, say, excessive bonuses or sub-prime mortgages], you might want to see my previous posts here and here):

It was mid-2008 and a little-noticed wrangle was taking place . . . . On one side . . . stood a group of banks that included Merrill Lynch of the US and France’s Société Générale. On the other: Security Capital Assurance (SCA), a Bermuda-based bond insurer that had run into difficulties as the US subprime mortgage market imploded. At stake was how much money the banks should receive on insurance contracts that SCA provided for complex pools of mortgage securities known as collateralised debt obligations, or CDOs.

Among other reasons, the banks had bought the insurance – called credit default swaps, or CDSs – to protect themselves against a panic just like the one sweeping the markets at that time. But SCA lacked sufficient capital to pay the claims in full and the banks feared that if the insurer went under, they would receive nothing.

Something had to give. After heated talks, Merrill agreed that July to cancel its CDS contracts for a pay-out of 14 cents on the dollar – a severe “haircut,” in market parlance. The other banks also reduced their original claims. At the conclusion of talks that dragged on until May 2009, not a single lender was paid in full.

That is potentially awkward for Mr. Geithner, who before joining the administration of President Barack Obama, was president of the Federal Reserve Bank of New York, the most important regional component of the US central banking system. . . . [D]id the government, though collusion or mistake . . . take billions of dollars from the taxpayers’ purse and put them into the coffers of some of the world’s largest banks without forcing them to accept much lower payments? Why, in other words, did the counterparties of AIG [who, thanks to Mr. Geithner, received 100 cents on the dollar for their CDS's] wind up with so much better a deal than those of SCA did – some of which were the same banks?

The whole piece is well worth reading; and there's another great, related article at HuffPo discussing "documents showing that Federal Reserve Board Chairman Ben Bernanke covered up the fact that his staff recommended he not bail out AIG" (emphasis supplied).