Part III of the Washington Post series on AIG. Today’s version: Downgrades And Downfall.

Here’s an excerpt:

Once a small part of the firm’s business, the increasingly popular [credit-default swaps] contracts had helped boost the company’s profits to record levels. The company’s computer models continued to show only a minute chance that the firm would ever pay out a dime on the contracts, and it turned down deals that didn’t meet its standards. After their reviews, Cassano and his team would consult with AIG executives, sometimes including chairman and chief executive Maurice “Hank” Greenberg. “We rode pretty tight rein on them,” Greenberg recalls.

But the swaps also exposed Financial Products and its parent AIG, the global insurance titan, to billions of dollars in possible losses. By spring 2005, some Financial Products executives were questioning the surge in volume. Among them was Cassano, an early advocate for the swaps business who ran the firm from its London office.

“How could we possibly be doing so many deals?” one executive recalls Cassano asking Frost, the firm’s liaison with Wall Street dealers, during one conference call. “Dealers know we can close and close quickly,” Frost said. “That’s why we’re the go-to.”

Efficiency wasn’t the only reason. Frost didn’t have to say aloud what everyone at the firm already appreciated. Financial Products had become the “go-to” for credit-default swaps in part because of its knowledge and reliability, but also because it had AIG’s backing. The parent company’s top-drawer, Triple A credit rating and its deep pockets assured customers that they could rest easy.

Their comfort turned out to be illusory. The credit-default swaps became a primary force in the disintegration of AIG as a private enterprise and a massive government rescue aimed at preventing catastrophic damage to the world’s financial system. Never in U.S. history has the government invested so much money trying to save a private company.

The entire series is well worth your reading time . . .

Source:
Downgrades And Downfall
Robert O’Harrow Jr. and Brady Dennis
Washington Post
December 31, 2008; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/30/AR2008123003431.html

Category: Bailouts, Corporate Management, Credit, Derivatives, Really, really bad calls

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One Response to “The Fall of AIG”

  1. charlie1939 says:

    It seems to me that the issue of how a company becomes “too big to fail” and thus potentially becomes the financial ward of the government (me and you) needs to be addressed. I believe that some provision is needed to keep companies small enough so they CANNOT become “too big to fail” or there needs to be a way to break up those who do become “too big to fail”. How does one evaluate the tipping point of “too big to fail” is then the question that needs to be answered…
    This latest financial debacle is proof positive that bigger is NOT necessarily better. The so-called cost efficiencies of bigness need to be balanced by the danger that a massive case of stupidity or excessive cleverness by a few may result in calamity for the many.