History Buffs

The WaPo did an exhaustive three part series (1, 2, 3) on the history of AIG Financial Products back to 1986.

Just to be snarky and pedantic, let me mock this, from the third part:

Financial Products had become the "go-to" for credit-default swaps in part because of its knowledge and reliability, but also because it had AIG's backing. The parent company's top-drawer, Triple A credit rating and its deep pockets assured customers that they could rest easy.

Accurate yet incomplete, IMHO.  In the Liddy letter to Geithner he mentions that AIG FP  has a bank subsidiary in France, Banque AIG, which hosts what they call the "Regulatory Capital Credit Default Swap book" totaling $234 billion.  Que pasa?  I do not hold myself out as an authority on the Basel capital accords and their subtle approach to weighting different risk assets, but I will say this - my understanding is that an asset such as a CDO that is guaranteed by a bank requires less capital support than such an asset lacking a guarantee or an asset guaranteed by a mere securities firm.  Hence the "Regulatory Capital" in the title of that huge CDS book.  That's my theory until I hear a better one.

MORE:  A fascinating letter.  Apparently, losses at AIG FP wiped out $675 million of a deferred compensation bonus pool.  Yet we hear a lot more about the $450 million in guarantees offered in order to induce people to stay on then we do about the $675 million they lost, and "reporters" like Steven Davidoff of the NY Times deal Book can write stuff like this:

Hedge fund managers typically only receive 20 percent of the profits and a 2 percent administrative fee. If the funds have losses, the managers receive nothing and they lose substantially because they have a significant amount of money invested directly in the funds itself. The managers are not then paid until they make back these losses.

In A.I.G.’s case, however, employees got 30 percent with very little personal risk (we don’t know how much of their compensation was in stock) and their overhead covered.

We don't know and we won't find out if we don't look.

Comments

[Charlie (Colorado)]

Just watching Charlie Rangel announcing a bill to tax 90 percent of the bonuses.

There's something jarring about watching Rangel talking about people needing to pay 90 percent tax on compensation from taxpayer money.

Can't put my finger on it.

[Elliott]

Happy birthday, Syl!

[kim]

Syl's probably celebrating with a climate cocktail. I see her now and then banging the climate boards.
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