Thursday, September 18, 2008

AIG blows up

John Gapper of the FT expresses the financial market watcher's anger and utter surprise over how some of the large financial institutions have been managed:

But AIG takes the biscuit. Here was a huge multinational insurance group with a reputation for solid underwriting and risk management that decided to diversify from insuring risks it knew well – car crashes and fires – to covering derivatives it did not understand.

Of course, it thought it understood them. In presentations to investors this year, it emphasised how thoroughly its AIG Financial Products arm assessed the risks of insuring CDOs. It ran all the data and decided that, in the worst case, it risked losing $2.4bn on the portfolio.

Well, $24bn of write-downs later – a mere 10 times its maximum estimate – the company has burned through its equity, spread financial chaos to all corners of the earth and humiliated the US Treasury. The job of insurance companies is to guard others against catastrophes, not cause them.

The word “irresponsible” does not begin to describe AIG’s behaviour

1 comment:

Anonymous said...

Sir, I agree with your assessment that AIG management is culpable of being remiss in their risk management. The trouble is they got to the lucrative (but dangerous) game of CDOs, which did not spare anyone. Remember MBIA and Ambac? Don't forget the ratings agencies' role in this. After all this, who will take the "AAA" stamp on any structured product seriously? This game alone brought them down. All of their other businesses are fine. The government couldn't let them fail because of their involvement in the massive unregulated CDS market. Nobody could fathom what the repercussions of an AIG bankruptcy would be. This is not the time for such experiment. For that that reason, the government had to takeover AIG and oversee an orderly disposal of assets. This will be a case study in risk management.