How do you lose $1B each business day?

[danmand]

It is kind of mind bogling that AIG managed to lose $1B each business day
last quarter. With 130,000 employees, each of them went to work and at the
end of the day had lost $8,000.

OPvbviously you cannot lose that kind of money in reguular business; AIG
must have played the casino in a big way, made enormous bets.

 

[james t kirk]

What they do is they give themselves a corporate enema when things are so bad that more bad news won't make much of a difference. Write off every last bad investment decision now when the market is in the tank.

Even if they released record profits next quarter, their stock price wouldn't reflect the good news.

 

[onthebottom]

NPR reported they underwrote an exposure about equal to the world GDP.....

OTB

 

[danmand]

NPR reported they underwrote an exposure about equal to the world GDP.....

OTB

I saw that, and that 350 people in the London office did it without any oversight.

 

[Aardvark154]

I saw that, and that 350 people in the London office did it without any oversight.

Well look at the single idiot who several years ago put Barrings Bank (one of the oldest investment banks in the world) out of business through unauthorized transactions.

 

[danmand]

Well look at the single idiot who several years ago put Barrings Bank (one of the oldest investment banks in the world) out of business through unauthorized transactions.

Yeah, you have a point. But I would not expect it from an insurance
company who has hordes of actuaries, who work the risk expectancies to
8 decimal points.

 

[fijiman]

NPR reported they underwrote an exposure about equal to the world GDP.....

OTB

Exactly.

They effectively provided a large amount of catastrophe insurance for the world's economy. As long as the wheels didn't fall of the global economic engine they were fine. In hindsight it seems stupid now, but at the time it was considered great business acumen.

If they had not provided this coverage then the $60b of losses would still have existed. But it would have shown up in other places throughout the world's economy (ie the balance sheets of the many other companies who bought the coverage from AIG)

It's sort of like a giant game of global economic musical chairs. And AIG are the one's that got caught out.

The reason why the Gov't keeps bailing them out is because if they don't, then AIG goes belly up. And what happens to the next $60b of losses that AIG was supposed to insure?? Well it comes to the balance sheet of a local financial institution near you

AIG's regular insurance businesses (ie cars, life insurance, etc), have continued to be entirely profitable.

fj

 

[fijiman]

Yeah, you have a point. But I would not expect it from an insurance
company who has hordes of actuaries, who work the risk expectancies to
8 decimal points.

Good point. But actuaries work the numbers based upon prior experience. It is easy when one is dealing with life expectancies and mortality tables because there is lots of data.

However in this case, it was a variety of newly developed financial products and the system had not yet been subjected to a catastrophic financial slowdown. Thus they likely had many financial models filled with assumptions, and those assumptions have now been proven inaccurate.

Of course, a smart insurance company doesn't take those kinds of risks. So AIG does indeed deserve what it got. Too bad though, since it really is a well run company in most areas. Someone in senior management just got a little too greedy.

fj

 

[onthebottom]

I saw that, and that 350 people in the London office did it without any oversight.

Yeah, money for nothing and your chicks for free.... and it took down the worlds largest insurance company..... I think they even paid retention bonuses to some of the idiots in NY.

OTB

 

[xix]

Can't count

THey lost it because dumb ass people started recommending buddies that the only thing they know to count is Kissing ASS.
]
Not surprised.

 

[onthebottom]

Yeah, you have a point. But I would not expect it from an insurance
company who has hordes of actuaries, who work the risk expectancies to
8 decimal points.

One problem is that none of the FSI firms to the 1% VAR risk seriously.... now they're living it.

OTB

 

[Rockslinger]

But actuaries work the numbers based upon prior experience. It is easy when one is dealing with life expectancies and mortality tables because there is lots of data.

I always wonder about these mortality tables. What happens if there is a WW III and/or the Black Death makes a comeback? Does the insurance company have enough reserves to make the payments? Or, do they turn to their lawyers to find an "out" clause? Or, or do they declare bankrupcy and walk away from the mess (of course, the execs still keep all their past bonuses)?

 

[fijiman]

I always wonder about these mortality tables. What happens if there is a WW III and/or the Black Death makes a comeback? Does the insurance company have enough reserves to make the payments? Or, do they turn to their lawyers to find an "out" clause? Or, or do they declare bankrupcy and walk away from the mess (of course, the execs still keep all their past bonuses)?

No need to turn to the lawyers. There are many plainly written exclusions within the policies ("act of war", "act of god" aka a meteorite/etc,...)

It is important to remember that in any insurance policy only specific things are insured. Even in a life insurance policy, it is not "death from any cause" but rather "death from the various causes which are inherently reflected in the mortality table which was used to determine the premium".

fj

 

[Rockslinger]

There are many plainly written exclusions within the policies ("act of war", "act of god" aka a meteorite/etc,...)

Wow! So the return of the Black Death or SARS would be considered an "Act of God". Shoot, so the life insurance company have BOTH God and the U.S. government behind them.

Didn't AIG write exclusions for "acts of God" in these credit default swaps? Did you know that the ABCP papers were backstopped by major banks but there was an exclusion of some sort and the banks bailed?

 

[fijiman]

A lot of people are complaining about the US "bailing out" AIG, and complaining about the US not providing a solution but simply a series of financial band-aids to AIG.

The problem is that there is no "magic pill" to cure this problem.

There are a large number of contracts in place which are funneling losses to AIG. If AIG isn't there, well, then instead of a $60b loss for AIG, instead you will have 30 financial instituions around the world each with $2b of losses. It will create chaos and a huge lack of confidence as everyone will view every financial institution as some sort of financial landmine.

The $60b the gov't gives to AIG is a pittance compared to the problems that will result if AIG isn't there as the financial backstop for all these losses. Further, the $60b gets spent to pay off various financial institutions around the world. So effectively, it gets sprinkled into the pockets of all of us (via pension funds, 401(k)s, etc)

fj

 

[Rockslinger]

The $60b the gov't gives to AIG is a pittance compared to the problems that will result if AIG isn't there as the financial backstop for all these losses. Further, the $60b gets spent to pay off various financial institutions around the world.

Ok, but how do we know that the $60billion is going to pay AIG's contractual obligations to counterparties and not to pay huge bonuses to executives and those 350 people in the London office who caused this mess? Bear in mind that these people (AIG, Merrill, Citigroup, etc.) are all ethically challenged. Would be a lot better if the U.S. government pay the counterparties directly.

 

[JohnLarue]

Would be a lot better if the U.S. government pay the counterparties directly.

That is logistically impossible.
By the time the govt figured out where the $ needs to go, the swaps would be a year or two in default

 

[fijiman]

Do you think the gov't is just dropping off $150b in unmarked bills and telling AIG to do whatever they want?

I work in finance and I've undergone various types of routine regulatory audits in my professional life. Only one of those was by the IRS, and that was enough. They were like a dog with a bone that would not let go. I probably answered the same questions 10 different ways before they were satisfied. In that audit, the amount that was being questioned was less than $10m.

I don't know the specifics of the gov't involvement with AIG's operations. But I'm pretty comfortable in telling you that they know EXACTLY where that money is getting spent.

This is finance. It isn't some wild west black ops in Iraq. It is pretty easy to add up the asset and liabilty cashflows, compare them to the last year, and track down the source of the differences.

If you lack faith in this process because AIG wasn't able to see what was coming...well, I can only say that it is a lot easier to add things up after they happen then before they happen.

fj

 

[ig-88]

I could use $1B each day.

 

[Rockslinger]

I don't know the specifics of the gov't involvement with AIG's operations. But I'm pretty comfortable in telling you that they know EXACTLY where that money is getting spent.

Ok. The concern is that when money goes from A to C through B, there could be "leakage".