The Rise and Fall of AIG Financial Products - TPMMuckraker

TPMMuckraker of Talking Points Memo is doing their homework and has some fascinating deep research articles on AIG. This one, The Rise and Falle of AIGFP:

The Seed Of Ruin Is Planted

- That year, JP Morgan approached AIG, proposing that, for a fee, AIG insure JP Morgan's complex corporate debt, in case of default. According to computer models devised by Gary Gorton, a Yale Business Professor and consultant to the unit, there was a 99.85 percent chance that AIGFP would never have to pay out on these deals. Essentially, this would happen only if the economy went into a full-blown depression, in which case, the AIGers believed, the counter-parties would be wiped out, and therefore would hardly be in a position to demand payment anyway. With the backing of Cassano, then the COO, Savage greenlighted the deals. Credit default swaps were born.

So, it all starts with some seriously bad math but the story continues and really starts to sound like Worldcom to the point the former CEO of AIGFP hired their attorney.

I've got a hint for ya, huge conglomerates. If you only have one consultant and you're risking say....a trillion dollars...
it's a really good idea to get a second opinion, even run some simulations periodically.

Also, while the world maybe shouting "off with their heads" it's good to see some detailed background articles on who is who at AIG so one can discover precisely who caused this debacle.

I personally am thinking few are looking into the finance mathematics, i.e. the quants, and if this business of bad math is not cleaned up....this will happen again.

What was the token phrase about assumptions, they make a what out of you and me?

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One year anniversary of Bear Stearns collapse

Since then the Federal Reserve has created:

1. Maiden Lane, LLC (I and II) For Bear Stearns bailout.

2. Term Auction Facility (TAF)

3. Central Bank Liquidity Swaps (CBLS)

4. Primary Dealer Credit Facility (PDCF)

5. Term Securities Lending Facility (TSLF)

6. Term Securities Lending Options Program (TOP)

7. Asset-Backed Commercial Paper MMF Liquidity Facility (AMLF)

8. Commercial Paper Funding Facility (CPFF)

9. Money Market Investor Funding Facility (MMIFF)

10. Term Asset-Backed Securities Loan Facility (TALF)

11. Outright ownership stake in AIG

12. Numerous other "loans" to JPM, Citi and BofA after the Lehman Bros. collapse

13. Outright monetization of Fannie/Freddie MBS and debt

14. Outright monetization of U.S. Treasuries

15. Expansion of TALF to support the soon-to-be-announced Treasury/FDIC/Fed program to offload dead, toxic "assets" from banks.

Total amount flung or committed to be flung by the Federal Reserve:

Approximately ELEVEN TRILLION!

And this doesn't include the money the Treasury has committed to this insanity.

plus now

they are talking about turning the Fed into a glorified FDIC or give it the authority to seize nonbank institutions, like AIG to deal with systemic risk.

The ability to seize nonbank institutions who post systemic risk sounds like a good idea but to give the Fed that much power considering the above, no way.

Great list, scary, shocking, also massive expansion of powers as I see this.