TARP is profitable. The government has successfully sold out its position in Citi. General Motors, another big recipient of aid, has gone public. Many of the emergency programs initiated in the fall of 2008 to keep the financial system from collapsing completely have been ended. Policymakers have declared victory.
And then there's AIG.
The massive insurance company ran into trouble by selling insurance on massive quantities of subprime bonds, requiring a multi-pronged bailout from the Federal Reserve and the Treasury with a total cost of over $150 billion. Thanks to asset sales and a general reflation in the credit markets, AIG has paid back a chunk of the bailout funds. But the taxpayers still own a huge chunk of AIG's stock, and it's not clear whether they will be made whole.
In a new book, Roddy Boyd, a veteran of Fortune, tells the inside, mind-boggling and frequently-profane story of how AIG blithely assumed massive amounts of risk. Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide makes the case that AIG suffered from "extreme, almost ahistorical, poor risk management controls" that made it the "largest repository of crummy mortgages and asset-backed securities in the free world." In the accompanying video, Boyd and I discuss Fatal Risk.
Fatal Risk is a story of institutional failure that is driven by strong personalities. The contours of the story are already well-known, but Boyd, a dogged and diligent investigative reporter, brings the story to life with great detail. Maurice "Hank" Greenberg ruled the company with an iron first for several decades before being forced out by then-Attorney General Eliot Spitzer. But the real action was in AIG's Financial Products unit, based in Connecticut. Founded by brilliant, risk-obsessed financiers, AIG Financial Products minted money as it pioneered new financing techniques. But under the leadership of Joseph Cassano, FP shifted strategy and began issuing insurance on mortgage bonds and collateralized debt obligations. And this proved to be the unmaking of the company.
In the midst of the housing boom, AIG FP, relying on a model developed by Yale professor Gary Gorton, sold insurance on the top-rated portions of collateralized debt obligations — without setting aside reserves to make good on those payments. "You never were going to pay it back because it would never be asked for," says Boyd. "They didn't even bother to hedge it." As Boyd reports, a separate unit exposed the company further to subprime by taking proceeds from its securities lending business and investing them into higher-yielding mortgage-backed securities. When the markets for these instruments seized up in 2007 and 2008, it left AIG exposed to the mercy of the market, and to its counterparties, like Goldman, Sachs. And that sent AIG rushing to the Federal Reserve for aid.
The irony: most of the people who made the decisions that sunk the company lost money when AIG's stock fell, but had made so much money in the years before that they came out fine. In a final section, Boyd documents how many of them have gone on to work in the financial services industry.
To see more of Boyd's work, go to TheFinancialInvestigator.com
Interested in a copy of Fatal Risk? Send an e-mail to firstname.lastname@example.org, and we'll enter you in a drawing for a free copy.
Daniel Gross is economics editor at Yahoo! Finance
Email him at email@example.com; follow him on Twitter @grossdm
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