Wednesday, December 31, 2008

The Fall of AIG

The Washington Post has a three part series on the downfall of AIG, and the role of the Financial Products Group. This is a story of how a subsidiary that was started making hedged transactions in derivatives expanded into credit default swaps. The idea was to leverage AIG's AAA credit rating and provide insurance against what seemed extremely low risks. As AIG's credit rating fell the cost of supporting the swaps increased as counterparties demanded more collateral. And the group's model did not adequately forecast the risks inherent in CDO's built from sub-prime lending.

It is an important story. What we see is that a business that started out limited expanded beyond its original horizons. As the business morhped risks increased in ways that were not recognized.

Justin Fox has some interesting comments on the series.

No comments: