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How AIG became too big to fail Time Mar 19 2009

Summary: How AIG Became Too Big to FailBy Bill Saporito Thursday Mar 19 2009 천문학적인 공적자금이 투입된 부실기업의 대명사 AIG가 직원들에게 거액의 보너스를 지급해서 지금 큰 논란입니다 금융권의 비도덕 비윤리적 이기적 행태가 이미 정도를 넘어선 것 같습니다 시간이 되면번역을 해 두도록 하겠습니다 How AIG Became Too Big to FailBy Bill Saporito Treasury Secretary Tim Geithner had every reason to think he had seen all of AIG s dirty laundry The government owned 80 of the company and Geithner had just orchestrated AIG s most recent handout its fourth if you are keeping score for $30 billion on March 2 to prevent the teetering insurance giant from going over the cliff and taking the rest of the global financial system with it AIG had already cost the taxpayers some $170 billion mostly to repair the damage done by one　 of its units AIG Financial Products AIG FP which last year alone piled up $40 billion in losses related to its dealings in complex mortgage bond derivatives Then Geithner s staff made the discovery that would infuriate nearly everyone in Washington On March 10 the Secretary learned 10 days after his staff first got wind of it that AIG had paid out $165 million in retention bonuses to executives at the unit that compelled the U S to bail out the company in the first place It took Geithner until 7 40 the next night to place what must have been a tense phone call to AIG s newish CEO Ed Liddy The bonuses were not tenable they had to be canceled he demanded Liddy a dollar a year man who took over the company after the bonuses had been promised replied that AIG s lawyers had decided that the contracts could not be broken without even bigger costs to taxpayers Geithner sent Treasury s lawyers searching for a way out but they couldn t find one　 See 25 people to blame for the financial crisis On the balance sheet of debacles caused by this economic crisis the $700 billion Troubled Asset Relief Program TARP the stock market swoon the credit crunch and the ong　oing global recession $165 million is small change But the revelations of the AIG bonuses like nothing else seemed to finally tip the mounting public furor over corporate malpractice into a full scale rebellion Yet Geithner embarrassed for discovering the bonuses so late plans to dock AIG that much out of the next $30 billion in bailout funding when it is delivered which amounts to a mere 0 1 of the total AIG has received Assorted Senators from New York Democrat Chuck Schumer to Montana Democrat Max Baucus and Iowa Republican Chuck Grassley have proposed a number of tax and legal schemes to snatch back the bonus bucks from AIG FP executives 73 of whom got payouts of $1 million or more according to New York State attorney general Andrew Cuomo Read Treasury Learned of AIG Bonuses Earlier Than Claimed With all the political theater and populist grandstanding though the bigger issue has been obscured And that is Just what is AIG doing with the $170 billion Does the company s strategy which is to wind down its exposure to toxic assets and sell some of its profitable insurance divisions to help pay off the government debt stand a good chance of succeeding And if it does will the world avert financial Armageddon Those questions have taken on greater urgency since it turns out that AIG has become the banking industry s ATM essentially passing along $52 billion of TARP money to an array of U S and foreign financial institutions from Goldman Sachs to Switzerland s UBS Those firms were counterparties to the credit default swaps CDSs that AIG FP sold at least through 2005 and the companies were collecting on the insurance like derivatives AIG paid out an additional $43 7 billion to many of the same banks which were also customers of the securities lending operation run out of AIG s insurance division In this case AIG managed to take a business specifically designed to be low risk low return and amp it into another dicey venture with taxpayers on the hook The outrage will pass and when it does we re going to have to focus on whether keeping AIG afloat is preventing a sharp recession from becoming a prolonged one　 The reason AIG has cost taxpayers $170 billion and the reason the Obama Administration seemed willing at least at first to hold its nose and accede to bonuses for the company s managers is that it s too big to fail It s an often heard phrase but what does it really mean See the top 10 financial collapses of 2008 The idea is that in a global economy so tightly linked that problems in the U S real estate market can help bring down Icelandic banks and Asian manufacturers AIG sits at some of the critical switch points Its failure so the fear goes would set off chains of others rattling around the globe in short order Although some critics say the fear is overblown and the world economy could absorb the blow no one　 seems particularly keen on testing that approach How We Got HereAIG seems an unlikely candidate for the company that could bankrupt the planet Founded 90 years ago in Shanghai AIG moved its headquarters to New York City as the world headed toward war in 1939 After Maurice R Hank Greenberg took over in 1967 AIG consolidated its global empire By the time Greenberg was forced out in an accounting scandal 38 years later AIG had become one　 of the world s biggest public companies with sales of $113 billion in 2006 and 116 000 employees in 130 countries from France to China AIG says it has written more than 81 million life insurance policies with a face value of $1 9 trillion It covers roughly 180 000 small businesses and other corporate entities which employ approximately 106 million people That makes AIG America s largest life and health insurer second largest in property and casualty Through its aircraft leasing subsidiary AIG owns more than 950 airline jets Just for good measure AIG is a huge provider of insurance to U S municipalities pension funds and other public and private bodies through guaranteed investment contracts and other products that protect participants in 401 k plans We have no choice but to stabilize it or else risk enormous impact not just in the financial system but on the whole U S economy said Fed Chairman Ben Bernanke The risk is not in any one　 business but in the connections among them and in the industries in which they compete As AIG has pointed out in its own analysis The extent and interconnectedness of AIG s business is far reaching and encompasses customers across the globe ranging from governmental agencies corporations and consumers to counterparties A failure of AIG could create a chain reaction of enormous proportion Among other effects it could lead to mass redemptions of insurance policies which would theoretically destabilize the industry the withdrawal of $12 billion to $15 billion in U S consumer lending in a credit short universe and even damage airframe maker Boeing and jet engine maker GE since AIG s aircraft leasing unit buys more jets than anyone else While AIG s holdings are diverse nearly all its losses centered on AIG FP which until March 2008 was led by its high rolling president Joseph Cassano a tough talking Brooklyn N Y native who in the past eight years banked $280 million in cash compensation or exactly $115 million more than the bonuses at the center of the current controversy Cassano who helped found the AIG FP unit in 1987 built his money machine not on anything fraudulent but on what s been described as regulatory arbitrage As Bernanke explained recently AIG exploited a huge gap in the regulatory system There was no oversight of the Financial Products division This was a hedge fund basically that was attached to a large and stable insurance company See the worst business deals of 2008 See pictures of the recession of 1958 That hedge fund like unit built up a portfolio of $2 7 trillion in derivatives AIG FP eagerly offered to insure billions of dollars in derivative portfolios building up potential liabilities many times its capacity to pay out if the portfolios defaulted Few financial experts ever imagined the scope of the impending defaults Neither did regulators AIG s uncollateralized insurance combine was regulated by Washington s Office of Thrift Supervision whose task is to watch over savings and loan companies not global insurers And it wasn t watching AIG like other institutions was making a mint dealing in derivatives tied to the U S real estate market The boom was financed in part by collateralized debt obligations CDOs securities based on subprime mortgages that have come to define toxic asset Companies that held CDOs could offset their risk by buying CDSs from AIG FP Or they could simply speculate with the instrument It all worked fine until overbuilding by housing firms and overleveraging by consumers caused the bubble to burst Which in turn caused the value of CDOs to plunge Which caused holders of CDSs on such securities to demand payment from AIG Although a CDS is in its simplest form an insurance policy AIG was selling something far more exotic Say you buy a house and insure it The insurer doesn t offer the same policy on your house to everyone else in the neighborhood if it did and your house went up in flames the insurer could get wiped out In its CDS contracts though AIG wrote multiple insurance policies covering the same underlying package of increasingly toxic assets In essence it was underwriting systemic risk This is the opposite of what insurance companies are supposed to do diversify risk across the universe of policyholders One　 thing about the insurance model it relies on diversification as its means to exist says a top exec at an AIG competitor If an insurance company plays in a field where they underwrite systemic risk that s a totally different experience Is it ever Insurance companies can handle catastrophic risk but not systemic risk T How AIG Became Too Big to FailBy Bill Saporito Thursday Mar 19 2009 천문학적인 공적자금이 투입된 부실기업의 대명사 AIG가 직원들에게 거액의 보너스를 지급해서 지금 큰 논란입니다 금융권의 비도덕 비윤리적 이기적 행태가 이미 정도를 넘어선 것 같습니다 시간이 되면번역을 해 두도록 하겠습니다 How AIG Became Too Big to FailBy Bill Saporito Treasury Secretary Tim Geithner had every reason to think he had seen all of AIG s dirty laundry The government owned 80 of the company and Geithner had just orchestrated AIG s most recent handout its fourth if you are keeping score for $30 billion on March 2 to prevent the teetering insurance giant from going over the cliff and taking the rest of the global financial system with it AIG had already cost the taxpayers some $170 billion mostly to repair the damage done by one　 of its units AIG Financial Products AIG FP which last year alone piled up $40 billion in losses related to its dealings in complex mortgage bond derivatives Then Geithner s staff made the discovery that would infuriate nearly everyone in Washington On March 10 the Secretary learned 10 days after his staff first got wind of it that AIG had paid out $165 million in retention bonuses to executives at the unit that compelled the U S to bail out the company in the first place It took Geithner until 7 40 the next night to place what must have been a tense phone call to AIG s newish CEO Ed Liddy The bonuses were not tenable they had to be canceled he demanded Liddy a dollar a year man who took over the company after the bonuses had been promised replied that AIG s lawyers had decided that the contracts could not be broken without even bigger costs to taxpayers Geithner sent Treasury s lawyers searching for a way out but they couldn t find one　 See 25 people to blame for the financial crisis On the balance sheet of debacles caused by this economic crisis the $700 billion Troubled Asset Relief Program TARP the stock market swoon the credit crunch and the ong　oing global recession $165 million is small change But the revelations of the AIG bonuses like nothing else seemed to finally tip the mounting public furor over corporate malpractice into a full scale rebellion Yet Geithner embarrassed for discovering the bonuses so late plans to dock AIG that much out of the next $30 billion in bailout funding when it is delivered which amounts to a mere 0 1 of the total AIG has received Assorted Senators from New York Democrat Chuck Schumer to Montana Democrat Max Baucus and Iowa Republican Chuck Grassley have proposed a number of tax and legal schemes to snatch back the bonus bucks from AIG FP executives 73 of whom got payouts of $1 million or more according to New York State attorney general Andrew Cuomo Read Treasury Learned of AIG Bonuses Earlier Than Claimed With all the political theater and populist grandstanding though the bigger issue has been obscured And that is Just what is AIG doing with the $170 billion Does the company s strategy which is to wind down its exposure to toxic assets and sell some of its profitable insurance divisions to help pay off the government debt stand a good chance of succeeding And if it does will the world avert financial Armageddon Those questions have taken on greater urgency since it turns out that AIG has become the banking industry s ATM essentially passing along $52 billion of TARP money to an array of U S and foreign financial institutions from Goldman Sachs to Switzerland s UBS Those firms were counterparties to the credit default swaps CDSs that AIG FP sold at least through 2005 and the companies were collecting on the insurance like derivatives AIG paid out an additional $43 7 billion to many of the same banks which were also customers of the securities lending operation run out of AIG s insurance division In this case AIG managed to take a business specifically designed to be low risk low return and amp it into another dicey venture with taxpayers on the hook The outrage will pass and when it does we re going to have to focus on whether keeping AIG afloat is preventing a sharp recession from becoming a prolonged one　 The reason AIG has cost taxpayers $170 billion and the reason the Obama Administration seemed willing at least at first to hold its nose and accede to bonuses for the company s managers is that it s too big to fail It s an often heard phrase but what does it really mean See the top 10 financial collapses of 2008 The idea is that in a global economy so tightly linked that problems in the U S real estate market can help bring down Icelandic banks and Asian manufacturers AIG sits at some of the critical switch points Its failure so the fear goes would set off chains of others rattling around the globe in short order Although some critics say the fear is overblown and the world economy could absorb the blow no one　 seems particularly keen on testing that approach How We Got HereAIG seems an unlikely candidate for the company that could bankrupt the planet Founded 90 years ago in Shanghai AIG moved its headquarters to New York City as the world headed toward war in 1939 After Maurice R Hank Greenberg took over in 1967 AIG consolidated its global empire By the time Greenberg was forced out in an accounting scandal 38 years later AIG had become one　 of the world s biggest public companies with sales of $113 billion in 2006 and 116 000 employees in 130 countries from France to China AIG says it has written more than 81 million life insurance policies with a face value of $1 9 trillion It covers roughly 180 000 small businesses and other corporate entities which employ approximately 106 million people That makes AIG America s largest life and health insurer second largest in property and casualty Through its aircraft leasing subsidiary AIG owns more than 950 airline jets Just for good measure AIG is a huge provider of insurance to U S municipalities pension funds and other public and private bodies through guaranteed investment contracts and other products that protect participants in 401 k plans We have no choice but to stabilize it or else risk enormous impact not just in the financial system but on the whole U S economy said Fed Chairman Ben Bernanke The risk is not in any one　 business but in the connections among them and in the industries in which they compete As AIG has pointed out in its own analysis The extent and interconnectedness of AIG s business is far reaching and encompasses customers across the globe ranging from governmental agencies corporations and consumers to counterparties A failure of AIG could create a chain reaction of enormous proportion Among other effects it could lead to mass redemptions of insurance policies which would theoretically destabilize the industry the withdrawal of $12 billion to $15 billion in U S consumer lending in a credit short universe and even damage airframe maker Boeing and jet engine maker GE since AIG s aircraft leasing unit buys more jets than anyone else While AIG s holdings are diverse nearly all its losses centered on AIG FP which until March 2008 was led by its high rolling president Joseph Cassano a tough talking Brooklyn N Y native who in the past eight years banked $280 million in cash compensation or exactly $115 million more than the bonuses at the center of the current controversy Cassano who helped found the AIG FP unit in 1987 built his money machine not on anything fraudulent but on what s been described as regulatory arbitrage As Bernanke explained recently AIG exploited a huge gap in the regulatory system There was no oversight of the Financial Products division This was a hedge fund basically that was attached to a large and stable insurance company See the worst business deals of 2008 See pictures of the recession of 1958 That hedge fund like unit built up a portfolio of $2 7 trillion in derivatives AIG FP eagerly offered to insure billions of dollars in derivative portfolios building up potential liabilities many times its capacity to pay out if the portfolios defaulted Few financial experts ever imagined the scope of the impending defaults Neither did regulators AIG s uncollateralized insurance combine was regulated by Washington s Office of Thrift Supervision whose task is to watch over savings and loan companies not global insurers And it wasn t watching AIG like other institutions was making a mint dealing in derivatives tied to the U S real estate market The boom was financed in part by collateralized debt obligations CDOs securities based on subprime mortgages that have come to define toxic asset Companies that held CDOs could offset their risk by buying CDSs from AIG FP Or they could simply speculate with the instrument It all worked fine until overbuilding by housing firms and overleveraging by consumers caused the bubble to burst Which in turn caused the value of CDOs to plunge Which caused holders of CDSs on such securities to demand payment from AIG Although a CDS is in its simplest form an insurance policy AIG was selling something far more exotic Say you buy a house and insure it The insurer doesn t offer the same policy on your house to everyone else in the neighborhood if it did and your house went up in flames the insurer could get wiped out In its CDS contracts though AIG wrote multiple insurance policies covering the same underlying package of increasingly toxic assets In essence it was underwriting systemic risk This is the opposite of what insurance companies are supposed to do diversify risk across the universe of policyholders One　 thing about the insurance model it relies on diversification as its means to exist says a top exec at an AIG competitor If an insurance company plays in a field where they underwrite systemic risk that s a totally different experience Is it ever Insurance companies can handle catastrophic risk but not systemic risk T

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