Simply astonishing. As the facts come out about the roots of our financial bubble and the resulting crash, I just shake my head.
So many people, professionals no less, abdicated their personal responsibilities in order to make a few extra bucks -- AND the government regulators we entrusted to protect the system sat idly by while they did it.
You can rail about the ignorance of poor people, ie subprime borrowers, but there is a higher standard for risk-management professionals. Like AIG.
Face it, banking and insurance are dull -- by design. We are now all experiencing the results of banks trying to "goose profits" and make their businesses more exciting.
To make and extra 0.2% or $150, AIG risked (and probably lost) $70,000.
That is the kind of "risk management" that should have sounded alarms. Especially since our precious tax dollars (raised through taxes not through tax cuts) are going to be used to pay that money back.
And let's not forget that none of it would have happened if the credit rating agencies had not rated these mortgage-backed securities as AAA.
Greed drove these companies to commit gross acts of poor judgement and yet most of them are still in business (or office). A few may have lost their jobs but none of them are in prison.
An AIG Unit's Quest to Juice Profit
Securities-Lending Business Made Risky Bets. They Backfired on Insurer
Wall Street Journal
February 5, 2009
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.
