AIG – “All In, Guys”

At the heart of the Financial Crisis AIG needed over $80 billion in support from the Federal Government. Now they’re talking about paying it all back. What’s going on?

Was AIG simply a group of well-run companies that was undone by a rogue trader who got onto the wrong side of the Credit Default Swap market in residential mortgages? No, they also made massive investments in residential mortgages throughout the company.

AIG and its far-flung operations were part of a financial machine, where money serves not just as a medium of exchange or a store of value, but as the raw material in a gold-breeding operation that makes money from money. Finance is supposed to be about the efficient allocation of capital, and insurance is supposed to be about pooling risks. But AIG got swept up in the housing bubble and placed in effect a huge bet on residential mortgages. It needed a giant hard-money loan to make good when that bet went south. The US Government was the only one with enough cash on hand to help them cover.

At its heart, the risk-pooler AIG failed to manage its risk and misallocated capital to the wrong sector. From 1968 to 2005 Hank Greenberg managed the company with himself as the key risk-control officer, but by the time of his ouster (amidst an accounting scandal) AIG was already “all-in” with its housing bet. Its AAA rating was at risk–and with that, its business–and nobody knew.

The temporary loans have allowed AIG to dismember itself gradually, paying them back over time, but it’s now a shadow of its former self. Its outsized bets created huge financial losses that have been borne by the shareholders. AIG serves as a huge lesson in a global morality play: know yourself.

Douglas R. Tengdin, CFA
Chief Investment Officer
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