Krugman is not a fan of the bonuses tax bill either — but he blames Geithner et al. for getting us to the point where we’re lamely flailing about trying to get the bonuses back.

Norm Coleman’s own lawyer concedes he isn’t going to win the Minnesota election contest. They’re pinning their hopes on the appeal.

Zack Roth takes us through a brief history of AIGFP, the financial products division that brought AIG to its knees.

It’s highly technical. And it’s really hard even for the experts to figure out, let alone those of us who stick to simple addition and occasional division. But with all the conversation about AIG, it’s worth focusing our attention back on just how much of the current debate — and the approach we’re taking — revolves around what happened to Lehman Brothers.

In short, last September, the Fed & Treasury ‘allowed’ Lehman to collapse into bankruptcy and global credit markets seized up into a global spasm that kicked the global financial crisis into really high gear. We hovered on the edge of real cataclysm and managed to work our way back to mere global crisis over a period of a couple months.

It’s the Lehman experience which is behind the widespread and possibly accurate assumption that we have no choice but to pay back all the creditors and counter-parties of the big — and probably insolvent — banks at full dollar value.

But is the assumption correct?

There’s one debate about whether it was really Lehman’s collapse or the Treasury’s reaction to it that caused the crisis. In as much as I’m able to understand the different arguments, this one seems pretty unconvincing.

But that’s not the only question.

Lehman went under when there was much less widespread recognition of the extent of the financial crisis. And — perhaps much more importantly — it was done in a totally uncontrolled way. There was no effort to engineer some sort of managed receivership.

Now, a number of the smartest economists I know and whose judgments and values I really trust, think that the abyss we were looking into was so deep and vast, that it’s just not worth chancing it. But there are very sharp people who make contrary arguments.

I don’t have any answers on this one. But for those of us who are spectators and involuntary stakeholders in the drama, it is worth remembering just how many dollars ride on interpretations of the Lehman experience.

A great exchange on CNBC between the anchor and Rep. Brad Sherman (D-CA), one of the few elected voices of reason during the financial crisis:

TPM Reader MH makes the case that Lehman’s collapse was really that bad and we can’t let it happen again …

The problem that the Lehman Brother’s bankruptcy exposed is that, in these complex derivative investments, it’s not always clear where the counterparty risk lies.  These transactions are non-traditional in structure and so its often not clear how bankruptcy rules will apply to them. There’s very little relevant case law and these transactions just weren’t designed with much thought toward this contingency (no one imaged that these large couterparties could ever fail).  Things don’t fit neatly into statutory boxes, so it’s not clear what the bankruptcy court will do and who will end up getting their money back.  So when Lehman went bankrupt, everyone had to try to assess the degree to which they were exposed to the potential bankruptcy of other major counterparties.  And that’s really hard to do with any accuracy.  That’s why everything froze up.  No one could get an accurate assessment of their own exposure.

The fear people have now–and justifiably so, I think–is that the only thing keeping the financial system functioning at all right now is the assumption that the major governments of the world will not allow any other major counterparties to default.  If even one of them is allowed to fail, that assumption immediately goes out the window and suddenly everyone will have to assume that any major counterparty could fail at any moment.  If that happens, everything will grind to a hault again.

  

Minnesota Dem spokesman: Refreshing to see Coleman team telling the truth.

From TPM reader JS …

Nearly everything reader MH writes is, to greater or lesser degrees, incorrect.  Might as well have been written by Vikram Pandit. 

I don’t have time to get into this right now, but attached is a very good description of what went down in the fourth quarter of 2008, including a detailed account of exactly what happened after Lehman failed.  Note that a lot of the CDS/counterparty issues were resolved over the weekend before they let LEH go, and that since then the Fed has put in place liquidity backstops that prevent many of the post-LEH consequences from recurring even in the event of another major bankruptcy.  Taking the big money-center banks into receivership would indeed be an exceedingly complex task requiring considerable preparation, much of it done in secrecy.  but it can be done.

This is almost too silly for words, but since others have been writing about it today, let me update you, too. I’m pretty new to the world of Twitter, so I was a bit surprised (but mostly amused) when ABC’s Jake Tapper blocked me from following his Twitter feed after my post this morning knocking his reaction to the Obama Special Olympics gaffe. Others were blocked, too, although it’s not clear to me exactly why. In any event, Tapper, in what I guess is a Twitter equivalent of a peace offering, started following my Twitter feed this afternoon, and I am now able to follow his again. He twittered: “tpm is unblocked. My bad”

Now back to the economy collapsing around us.

J Street director Jeremy Ben-Ami sat down with TPM news editor Justin Elliott this week in Manhattan to discuss the group’s role now that Barack Obama is President. Among other things, Ben-Ami defends J Street’s decision to sit out the battle over the administration’s National Intelligence Council pick, Chas Freeman, who withdrew after he was vilified by the right-wing pro-Israel community: