Another Look Inside AIG

By Markham Lee on February 7, 2009 More Posts By Markham Lee Author's Website For the most part AIG’s (AIG: 1.04 +0.04 +4.00%) collapse has focused on the derivatives trades inside their Financial Products division, but it appears that their investment unit was a major culprit as well: From the WSJ: Accounts of AIG’s near collapse have largely focused on soured trades entered into by the company’s Financial Products division. But a close look at the 2,000-employee AIG Investments unit shows how this part of the conglomerate made gambles that helped cripple the firm. n running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime-mortgage bonds. That turned out to be a riskier approach than some rivals’, who parked cash from securities lending mostly in low-risk or short-term investments such as Treasury securities and commercial paper, according to analysts. The idea behind securities lending is to take advantage of large numbers. Insurers like AIG accumulate large quantities of long-term corporate bonds and other securities, earmarked to pay claims down the road. They can goose that return by lending out the securities to banks and brokers in exchange for cash collateral. The insurers then invest that cash to squeeze out a bit more yield for themselves and the securities borrowers. They usually achieve this by parking the cash in other fixed-income investments, such as Treasury bonds or short-term corporate debt. The extra profits can be just hundredths of a percentage point. But when applied to tens of billions of dollars of securities, the returns can be significant. At one point, AIG Investments was putting about $70 billion into subprime-mortgage bonds and other higher-risk assets, said people familiar with the matter. These choices helped AIG squeeze an additional 0.2 percentage point in yield, or roughly $150 million in revenue. AIG’s spokeswoman said the firm “invested counterparty cash in highly liquid, floating rate, triple-A-rated” residential mortgage-backed securities. The approach backfired, exacerbating the liquidity crunch that forced the U.S. government’s initial $85 billion bailout of AIG in September. The losses didn’t stop then: Besides a $60 billion credit line to AIG, the Federal Reserve last December provided $19 billion to wall off losses purchased by AIG Investments’ securities-lending program. In all, the total rescue package now sits at $150 billion. Graphic Courtesy of the WSJ Isn’t it hard to not view CDOs (and other debt securities) as some sort of Ivy League scam? What else do you call it when you mix in a bunch of highly suspect mortgages in with a bunch of good ones, and call the whole thing “Triple A Rated”. Like I said before there are criminals in jail for running Ponzi schemes who are looking at some of the shenanigans on Wall St and wondering why they’re in jail, while the clowns who destroyed Wall St and crushed the American economy are running around free. Reading this article also makes me think that our entire financial system was being run on the assumption that nothing would ever go wrong, or that chances for things to go wrong was so small as to be all together irrelevant. I suppose it’s like leaving your door unlocked if you live in a safe and relatively crime free neighborhood, yes, chances are nothing will happen, but if some random meth head tries your door and finds it unlocked… You can read more here. Source: The WSJ: “An AIG Unit’s Quest to Juice Profit” — Serena NG, Liam Pleven, February 5, 2009