AIG: Res Ipsa Loquitur
by ilene - September 4th, 2010 9:49 pm
AIG: Res Ipsa Loquitur
Courtesy of Roddy Boyd, The Financial Investigator
Editor’s Note: A graf was added describing the signal contribution of The Wall Street Journal’s Serena Ng and Liam Pleven in explaining the Securities Lending unit in a February 5, 2009 article. Rather than fold it into the graf where I describe how Miles Weiss and Andrew Ross Sorkin advanced the story, I chose to break it out seperately. Accountability and transparency, to say nothing of accuracy, is central to enterprise reporting and when I fall short, I seek to immediately remedy the situation.
The Financial Crisis Inquiry Commission’s document release last Wednesday doesn’t offer the curious an answer to a question that hasn’t received much play since AIG’s collapse in September 2008.
The question is: “How Did AIG really collapse?”
Not: “How did they get in trouble?” Or: “Who is to Blame?”
But rather, what led to a firm that had a AA- rating, around $160-billion in market cap and $14-billion in profits–with real cash generation capacity to boot– in fiscal 2006 effectively go out of business in September 2008?
The answer is not Goldman Sachs.
It would be exceptionally easy–for no one more so than me since as I am in the process of writing a book on the collapse of AIG called Fatal Risk–if it had though.
The picture painted of Goldman Sachs, especially from legislators in Washington D.C. and the media–nowhere more so than the business desk of the New York Times–centers largely on the now infamous series of swaps that one of Goldman’s proprietary trading desks entered into with AIG as central to its collapse. In this view, Goldman’s meticulous enforcement of so-called credit support agreements and the billions of dollars in collateral calls forced upon AIG’s Financial Products unit is seen as fatal.
Yet months of investigation into the matter suggest a different answer: What killed AIG was much more likely the financial and managerial collapse within AIG Global Investment Corporation’s securities lending program.
The management of the unit, under Win Neuger, took a portfolio that had been throwing off about four basis points of profit since inception in the 1990s and in 2005 began imposing a 30-basis point profit target. Outside of the sheer impossibility of improving margins 7.5 times, the practical hurdles to obtaining creditworthiness and liquidity were formidable. So daunting, in fact, that creditworthiness and liquidity were tossed out and a…