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AIG’s Financial Products Division

Posted By Barry Ritholtz On December 29, 2008 @ 7:59 pm In Bailouts,Corporate Management,Derivatives,Regulation | Comments Disabled

I’m fascinated by this huge article in the Washington Post called The Beautiful Machine [1]. Its about AIG’s Financial Products divisions, a hugely profitable operation specializing in derivatives, with roots in Drexel Burnham, that traces its AIG affiliation all the back to 1987.

Its the first of three parts, and I’ll pull excerpts from each. Here’s Monday’s:

“Over the past two decades, their enterprise, AIG Financial Products, evolved into an indispensable aid to such investment banks as Goldman Sachs and Merrill Lynch, as well as governments, municipalities and corporations around the world. The firm developed innovative solutions for its clients, including new methods to free up cash, get rid of debt and guard against rising interest rates or currency fluctuations.

Financial Products unleashed techniques that others on Wall Street rushed to emulate, creating vast, interlocking deals that bound together financial institutions in ways that no one fully understood and contributed to the demise of its parent company as a private enterprise. In the panic of mid-September’s crash, the Bush administration said that AIG had grown too intertwined with the global economy to fail and made the extraordinary decision to take over the reeling giant. The bailout stands at $152 billion and counting — almost 10 times as large as the rescue for the American auto industry.

Many of the most compelling aspects of the economic cataclysm can be seen through the story of AIG and its Financial Products unit: the failure of credit-rating firms, the absence of meaningful federal regulation, the mistaken belief that private contracts did not pose systemic risk, the veneration of computer models and quantitative analysis.

At the end, though, the story of Financial Products is not about math and financial formulas. It is a parable about people who thought they could outwit competitors and market forces alike, and who behaved as though they were uniquely positioned to sidestep the disasters that had destroyed so many financial dreams before them.”

Go read the full piece . . . More tomorrow.

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Source:
The Beautiful Machine [1] (part 1 of 3)
Robert O’Harrow Jr. and Brady Dennis
Washington Post, Monday, December 29, 2008; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/28/AR2008122801916.html


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[1] The Beautiful Machine: http://www.ritholtz.com/blog http://www.washingtonpost.com/wp-dyn/content/article/2008/12/28/AR2008122801916.html

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