Dissecting AIG's Failure

Sunday, January 11, 2009

The Post's series on AIG ["The Crash: What Went Wrong," front page, Dec. 29-31] noted the company's belief that the credit-default swaps that ultimately led to its collapse were sound because the quality of the insured debt ensured minimal risk even under worst-case scenarios.

The question no one appears to have asked was why anyone would be willing to pay substantial amounts to avoid a virtually nonexistent risk. The fantasy of perpetual motion is a recurrent one throughout the history of "innovative" insurance products, in which credit-default swaps may now take their rightful place.

Other reporting has detailed the tremendous profitability of AIG's Financial Products unit and the entrepreneurial-level compensation its managers enjoyed. But why would an insurance product be so staggeringly profitable? Competition to provide what is, essentially, cleverly sifted publicly available information should have pushed profit margins down, but it did not.

When an insurance product's profit margins exceed 80 percent, as AIG reported in 2005, we know one of two things: Either the product is valueless because the risk is nonexistent, or it is valueless because the insurer does not intend to, or will not be capable of, meeting its obligations. At $150 billion in taxpayer funds and counting, we now know AIG's true business model.




The fascinating three-part series by staff writers Robert O'Harrow Jr. and Brady Dennis about the people and forces contributing to the collapse of AIG was a disturbing look at the greed and arrogance of that company's executives. It also revealed the complete abdication of oversight by Securities and Exchange Commission staffers and other government officials who should have discovered this economic time bomb before it went off in their faces.

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