This is a terrific article that shows how and why AIG got involved in credit-default swaps. You can see how a simple decision backed by the need to make even more easy money ultimately landed AIG in hot water. I wonder when they’ll talk about why the fed decided to help AIG and not Lehman Brothers (Mr Paulison?????).
A Crack in The System
By 1998, AIG Financial Products had made hundreds of millions of dollars and had captured Wall Street’s attention with its precise, finely balanced system for managing risk. Then it subtly turned in a dangerous direction.
By Brady Dennis and Robert O’Harrow Jr.
For months, several executives at AIG Financial Products had pulled apart the data, looking for flaws in the logic. In phone calls and e-mails, at meetings and on their trading floor, they kept asking themselves in early 1998: Could this be right? What are we missing?
Their debate centered on a consultant’s computer model and a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company’s corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.
The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations. As AIG’s top executives and Tom Savage, the 48-year-old Financial Products president, understood the model’s projections, the U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events that would require Financial Products to cover defaults…….(more)
