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September 16, 2008

AIG: Farewell, My (Not-So) Lovely?

The collapse of AIG over the course of just a few days may be astonishing, but in some respects, it is not surprising. A few years ago, AIG stock sold for $100. Today, it's listed at $1.54. AIG is all about risk: much of it reasonable, but a significant portion of it fatally flawed. Remember David Halberstam's "The Best and the Brightest" - the story of how very bright men, led by Robert MacNamara, led this nation astray into the swamps of Vietnam? Now the very bright folks at AIG are up to their necks in an another repulsive form of the Big Muddy.

Our colleague Joe Paduda has a personal story to tell about AIG: he once worked for the behemoth insurer and was asked to sit in on a meeting of the executive staff, all of whom reported to the legendary Hank Greenberg. (We blogged a strange attempt to clean up Hank's public image here.) Hank had one question for everyone sitting around the conference table: how much money has your division made? No excuses. No stories about value added. No details about lives made better or risks averted. Hank wants to see the bucks! Grown men quaked as the time came to make their presentations.

As the owner of 12 percent of AIG, Hank just took a very expensive bath. He lost more money this weekend than all the readers of this blog will collectively make in their lifetimes.

So how did this happen? How did the biggest insurer on the planet suddenly run out of money?

Risk Transfer for Dummies
One of AIG's business units sold credit protection against the possibility of default in a variety of assets, including, of course, sub-prime mortgages. (Why were so many astute business people so anxious to lend money to folks they knew could not pay it back? What am I missing here?) AIG has lost at least $18 billion over the last three quarters. And according to some reports, they continued to understate the scale of the losses as recently as last week. Like their compatriots at the now-defunct Lehman Brothers, they kept paddling their canoes up de Nile.

The irony is that AIG has plenty of money. Unfortunately, it's tied up in the form of reserves, spread across their multi-faceted insurance operations. It's money set aside to pay claims. It appears that New York state is allowing AIG to access some of these reserves for cash flow. (Presumably, this will not impact AIG's ability to pay claims...) This will fall far short of the approximately $75 billion that AIG needs to survive the crisis.

Thus we have the bizarre prospect of a mostly profitable company going belly up because of the losses in one of its divisions. It's too bad Hank was forced out of the company by the now departed Elliot Spitzer. I would love to have been at a recent roundtable of company executives, answering Hank's one and only question.

The derivatives whiz pulls on the collar of his $400 shirt and sweats into his coffee mug. He mutters almost inaudibly, "$75 billion."

Hank lights up like a pinball machine: "You made $75 billion?"

Derivatives whiz whispers: "Lost."

Hank turns the color of an uncooked lobster: "Lost? You lost $75 billion?" Hank reaches across the table to throttle the whiz, but something seizes his body from within and sprawls him across the table. He is trying to talk, but no words are coming out of his mouth. A coffee colored foam dribbles from his lips.

It looks like a medical crisis, but no one moves. They just sit in their chairs, looking down at the table and straightening the lapels on their $2,000 suits...

OK, I'm no Raymond Chandler. But then again, not even Chandler could come up with a story as full of greed and self-deception as that of the once mighty AIG.

Posted by Jon Coppelman at 11:17 AM Link to, Comment (1), or E-mail this post
Comments

The bail out of AIG, Freddie and Fannie, should not have been allowed. Bail outs do not change risk-taking behaviors by companies. Bail outs remove responsiblility of management, customers, and stock holders. Laws re transperancy and its enforcement need to be improved.
I have never taken a mortgage that I could not pay back. I have never taken business risks that were unethical or incompetent. Those who do should bear the responsibility of their actions.
Laissez–faire capitalism was the basis of our democracy and we need to embrace it again.

Posted by: Dave at September 19, 2008 11:51 AM
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