The AIG Scandal 45 comments
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While I was stuck for most of today in areas of London which seemingly had no wifi coffee shops, AIG managed to contrive to lose $61 billion in a single quarter ($670 million a day!) and the stock market finally gave up any hope of staying above Dow 7000; S&P 700 is only six points away.
It's fascinating to me that AIG is still a publicly-listed company: the official Treasury statement goes to great lengths to perpetuate the fiction that AIG and the US government are two separate and distinct things, and to emphasize that this period of "public ownership" (they don't use the word "nationalization") will come to an end "as rapidly as possible".
I doubt it'll happen: under any ownership but that of the government, the ratings agencies would never have been so happy to pre-approve today's deal, and any sale by the government will be almost impossible without jeopardizing those all-important ratings. Besides, AIG does something only the government can ever do, as Justin Fox explains:
Essentially, AIG got into the business of insuring much of the world's financial system against the consequences of a global financial meltdown. It turned out to be incapable of delivering on that insurance--no private company could deliver on it, which is one reason why AIG's business of selling credit default swaps was a scam. And so government has stepped has stepped in as the ultimate insurer.
Providing insurance where private institutions can't is one of the most important and essential roles of government.
The scandal here is not the size of the losses from the global financial meltdown -- those are losses which sooner or later, in one form or another, would have had to be borne by the government anyway. Rather, the scandal is that AIG could have earned billions of dollars by selling insurance against a meltdown, even as it was wholly incapable of paying out on those policies.
I wouldn't be surprised to learn that Hank Greenberg was still a billionaire, even as the policies his company wrote have cost the average American household some $1,600. It's time for his wealth to be confiscated: it might be only a drop in the bucket compared to AIG's total losses, but it would feel very right.
Disclosure: No positions
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This article has 45 comments:
We need a Spanish inquisition type off purge after what these criminals have done.
"Capitalisim for Profits and Socialism for Losses" is over!
But it's not just the AIG execs. What about the so-called regulators who should have been watching to make sure the "too big to fail" business was not being too reckless to survive? What about the ratings agencies? We could go on...
it's time to bring the hammer down....
That's ultimately the sad part of this entire sordid affair. AIG actually THOUGHT it could weather whatever came.
Obviously, if you constantly predict sunny weather, why even own an umbrella?
It's always easier to understand things in hindsight, but even putting aside valuations of these assets, they should have been able to see that their correlations were all going to end up being 1 (everything would go to hell at the same time) from the historical example of LTCM.
It's not like that affair wasn't well-publicized and studied. AIG had many of the SAME types of hedges, swaps, and insurance agreements that they had. It's not an "unprecedented" crisis. The particulars may be different, but what destroyed them were many of the EXACT SAME ASSETS. Given that they're paid for this, they should have at least realized the problems with THESE.
It's not a problem of inadequate capital or any deliberate attempt. It's more unforgivable shortsightedness.
Why is Cassano, the head of AIG financial products not in jail. He made CDS so complicated that nobody could comprehend it, and the big wheels at AIG like Sullivan and Greenberg were not humble enough to admit that. And then Cassano said a little more than a year ago that he could not see any way that AIG would lose one dollar on CDS.
Go after Cassano. Hold all payments to counterparties who bought naked CDS from AIG FP until they can prove they had nothing to do with driving down the value of the underlying asset.
If something seems to good to be true, it probably is, so stay away from it.
If something is to complicated to understand, be humble enough to admit that.....and stay away from it.
Don't worry, you won't pay the $803.00 in extra taxes. Instead, next year you'll pay $1,606.00 for last year's $803.00 worth of goods and services.
Part of the reason for this is that the *financial servcies* industry (isn't that starting to sound like an oxymoron?) is by far the largest $$ contributor to BOTH political parties, and they really know how government works.
(We Won't Get Fooled Again!)
Of course, it doesn't help that most of the elected officials are as bad as the guys running the financial institutions that got us into this mess. It's the old "foxes watching the chickens" syndrome. And without something more than strong words from Washington, DC, I'm not clear whether we can simply buy our way out this oncoming financial depression.
On Mar 02 02:42 PM Michael Collins wrote:
> I second that. I want to see a major clawback on earnings these jerks
> got writing all these CDSs, at least 3 - 4 years. As for Greenberg,
> he needs to go straight to jail, do not pass go etc, and end up in
> the can next to Maddoff and Jeff Skiling. He is no different.
>
> We need a Spanish inquisition type off purge after what these criminals
> have done.
>
> "Capitalisim for Profits and Socialism for Losses" is over!
The entire country should be baying for the heads of the CEOs/exec's who created this mess. Why is there no outrage? We are just sucking it up again and again!
AIG was indeed a scam, writing insurance policies it could not pay off on. The government will prop it up regardless of the costs because of the fear that an AIG bankruptcy will bring down the entire financial system, which is falling down quite rapidly on its own.
Where do we hide until the storm is over?
When he thought the market had reached the bottom around last September, I deeply doubted his judgment. Sure enough, his firm's profit shed by 96% last quarter and right now he is telling people the market will be in shamles throughout 2009, 180 degree turnaround in his tone.
It would be very difficult to prove in court and beyond reasonable doubt that they had acted outside of the law. The bottom line is: How could you prosecute GREED?
I agree wholeheartedly with your analysis. I fear however, we shall never see a penny from Mr. Greenberg. The AIG mess is a poster child for regulating the swaps and derivatives market. As you have previously noted, the whole system is rotten to the core. When a private enterprise can go into business selling a product that it can't possibly deliver on, we have--to borrow a phrase--jumped the shark. It would be fantastic if Greenberg is sent to prison and ordered to contribute his wealth to the taxpayers that now own AIG, but I that's probably just wishful thinking.
Nik
Well, Obama and US Congress do not think so. They are fully behind these hoodlums.
Just look at Mandoff and his family enjoying their penthouse living, and these people were robbing banks and individuals investors indiscriminately.
There is a lot of scandalous things going on. If written down on paper it would be enough to fuel the fires of financial hell for a good many years.
By the way, need I remind everyone that Stanford and Madoff are still waltzing around in multi miliion dollar luxury (who knows maybe mailing out million dollar checks and billion dollar wire transfers also). What's the odds any of these execs will pay for their misdeeds?
wow, that's how you accumulate all those thumbs up...thumbs up you're...
If Madoff, Paulson, Greenberg, Stanford, et. al. have too little to fear from the law enforcement types (witness, for example, Madoff sitting in his penthouse negotiating with the authorities over the provenance of his $67 million and whether or not those particular sums were "ill-gotten.") then they need more to fear from the masses. They need to be be afraid to walk the streets lest they be assaulted by the ones who's lives and livelihoods they've ruined with their negligence, greed, stupidity, arrogance and deceit. When did this nation's citizens become so cowed that they no longer know when it's time to throw a few bricks and wreak some havoc? I, for one, have never as much as attended a demonstration, but I've come to believe it's time for Americans to raise some hell and strike some fear into some hearts.
It basically was just the biggest insurance company in the world (traditional insurance products)
However, a very small division of the company wrote all these CDS insurance policies that help grow the company earnings quickly but have now caused all the losses.
It was not intended to be a scam.
Obviously its a failure of regulation on behalf of the governement and a failure of risk management but not necessarily a crime.
I don't really think Greenberg was responsible for much of this. The CDS insurance exposure grew massively after he left.
Greenberg told Congress, under oath, that all his wealth was tied up in AIG stock and that he lost it all with the drop in their stock price. Greenberg was the one who approved AIG's entry into Credit Default Swaps, but he was always insistent that CDS exposure, which he didn't fully understand, be kept at modest levels. The big jump in their exposure came after he, and the original group that ran that division, was gone.
Felix, usually you do better research. This article, and especially the comments, sound like the ranting of a lynch mob.
> jack
On Mar 02 07:33 PM MaverickBian wrote:
> I remember Warren Buffett also sold billions of dollars in long-dated
> puts. Hope he will not become broke because of those almost "unlimited
> risk" investment.
>
> When he thought the market had reached the bottom around last September,
> I deeply doubted his judgment. Sure enough, his firm's profit shed
> by 96% last quarter and right now he is telling people the market
> will be in shamles throughout 2009, 180 degree turnaround in his
> tone.
Tucked deep within the details of AIG's $62B quarterly loss was a $5B write down on the value of the Company's commercial mortgage back securities portfolio(CMBS). AIG's vast losses that are attributable to credit default swaps, and the fact that it still has a net notional CDS exposure of ~$300B, mean that sometimes losses at the Company's other business segments are overshadowed. We have made our views on AIG quite clear, and so we point out the Company's CMBS losses not to lament the fall of AIG, but rather to speculate on the effect of this write-down on the rest of the banking industry.
Having been diminished to a "Ward of the State"-like status, we presume that AIG lacks the motivation to view its CMBS portfolio through a set of rose-colored lenses. The same can not be said for other financial institutions who, fearing even more Draconoian caps on compensation and executive perks, would very much like to avoid any sort of nationalization. Now, AIG values its CMBS portfolio, as of the end of 4Q '08, at $14.2B. Roughly 22% of the securities are of the 2007 vintage, and 64% of the total portfolio is either Office or Retail. Our point being, the characteristics of AIG's CMBS portfolio are very similar to a multitude of other market players, where 2007 marked the mountain top of total CMBS securitization, with a strong bias towards Office and Retail. It should be interesting to monitor the ongoing valuations that major financial institutions place on their CMBS holdings, especially in light of AIG's recent precedent, and the continued deterioration of that market.
TheValueatRisk.blogspo...
The CEOs have only been responsible for reaping the benefits of money funneled through lobbyists and exploiting the outcome.
The Complexity Of Corruption Is Vast.
Humans always act in their own self interest. This is why the Centralization Of Power is so detrimental. To Assume Benevolence Is Foolish.
On Mar 02 02:39 PM infp wrote:
> I agree! The executives of the offending financial institutions
> must be held liable for their breach of fiduciary responsibility.
> Why is no government agency (that I know of) attempting to recover
> any of these ill gotten gains? We cannot allow this massive amount
> of white collar crime to go unpunished.
With no reprisal there is no deterrent for ill behavior.
I appreciate your call to rational and back to a moderate tone.
However, if no justice is perceived by the masses then none will continue to willingly participate.
"Heads On Pikes" is a result of frustration. Financial Retribution For Crimes must be pursued to expose the fallacy of the system. If we never understand what allowed the current environment to manifest, we will never be able to guard against the next event.
On Mar 02 11:08 PM akapital wrote:
> ...geez you guys make a good lynch mob...not too bright huh
>
> wow, that's how you accumulate all those thumbs up...thumbs up you're...