Michael Lewis on A.I.G.
I think Lewis hits the nail on the head about how the media hysteria over the relatively minor (when you look at the dollars compared to the counterparty payouts) AIG bonus issue managed to completely miss the entire point and importance of the fiancial fiasco with AIG.
If we (society, etc.) can't even get the story straight about what really happened, what hope do we have to avoid repeating the same mistakes that lead to this bubble 5/10/25 years down the road from now? We're screwed.
It's strange how people don't notice problems when making huge amounts of money depends on things remaining the way they are. When it hits the fan, let the finger pointing begin.
The villain in this piece doesn't seem to be the overbearing, but somewhat clueless boss, but the Wall Street banks, in particular Goldman Sachs. It reminds me of Matt Taibbi's recent Rolling Stone article on "The Great American Bubble Machine", though without the screaming.
Great article by one of my favorite authors. A couple of points - it's dangerous to have executives, regulators, and legislators dealing with financial instruments that are very difficult to understand. It's also dangerous to build models on historical data when the rules are changing. IMO the root of the problem was people like Barney Frank and organizations like Fannie Mae who pushed for more subprime lending.
Michael Lewis always does a good job. He seemed to deliver a "Never attribute to malice that which is adequately explained by stupidity" type presentation.
It was an odd read. At first it starts out with the DeSantis story and him whining about how he and AIG FP were made out as the scapegoat. Then it goes on for four pages on how AIG FP loved the $$ they were making so just turned a blind eye to any risk or analysis.
I don't buy the excuse that the one boss is the villain just because he was an overbearing asshole.
I have liked Michael Lewis's writing since I read "Moneyball", which I highly recommend by the way. This article is pretty good, although not as math and statistics oriented as some of his good sports writing.
I think the large scale destruction of trust in the finance and investment world is going to be very hard to rebuild. I am not sure of all the implecations of that, but I think people of my generation are never going to poor money into the stock market via 401k or otherwise invest in the quantities and ways that the previous generation did.
The distruction of trust extends to the other side of as well, I think people like me will be much more reluctant to take on debt. This extends to starting businesses as well as consumer and housing debt. I have reached the point where I really don't give much thought to any startup idea that requires venture capital or other outside lending.
was posted several days ago: http://news.ycombinator.com/item?id=686344
for what it's worth - my summary:
-AIG FP was created in 1987 when Howard Sosin, former Drexel Burnham, created a model on how to value and trade interest-rate swaps
-The company to make money insuring these transactions could not be a bank (which would be bound by law to hoard unreasonable amounts of collateral), but needed AAA status: thus... an insurance company
-AIG stops sub-prime mortgage insurance business in 2005 after realizing that 95% of their mortgage-related portfolio is sub-prime
-Other firms instead jump into the lucrative market after 2004/2005... Wall Street underwrites 1.6 trillion $ in sub-prime and 1.2 trillion in Alt-A mortgages from 2004-2007
-AIG is bound by contract to provide collateral in case they lose AAA rating; as such legacy business (built up until 2005) traps them into bleeding collateral in the 2008 crash on their sub-prime credit default swap business
-In result AIG runs out of capital reserves to provide collateral
-By comparison, no money is lost on their corporate credit default swap business
It's a good read.
It looks like we now have a face to blame for the crisis: Joe Cassano, and he did it thanks to his incompetence and insecurity.