- The Big Picture - http://www.ritholtz.com/blog -

The Fall of AIG

Posted By Barry Ritholtz On December 31, 2008 @ 7:17 am In Bailouts,Corporate Management,Credit,Derivatives,Really, really bad calls | Comments Disabled

Part III of the Washington Post series on AIG. Today’s version: Downgrades And Downfall [1].

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 [1]
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


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2008/12/the-fall-of-aig/

URLs in this post:

[1] Downgrades And Downfall: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/30/AR2008123003431.html

Copyright © 2008 The Big Picture. All rights reserved.