The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses.

The South Korean government also demanded that the banks and the chaebols make a clean break. This generated a great deal of political noise  particularly when foreign managers were brought in, as when the Carlyle Group bought a stake in KorAm Bank in 2000 and Lone Star Funds purchased the Korea Exchange Bank in 2003.

But these reforms made all the difference. Banks became healthy and resumed lending within a few years after the crisis broke. The chaebols that survived are stronger than they were before the crisis. They are now withstanding the severe pressure of the global recession because they were forced to become better regulated, and more separate from banks.

Indonesia did not respond to the crisis so wisely, and the costs were severe. In 1997, Bambang Trihatmodjo, a son of President Suharto, had to close his troubled bank, Bank Andromeda, but proceeded to continue essentially the same operation under a different bank’s name. The new bank was only a small player in the overall economy, and the ruling elite seemed to think that no one would care. But Indonesia lost the support of the United States when it reneged on promises to replace failed bankers with more competent and honest ones.

The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.