TPMMuckraker of Talking Points Memo is doing their homework and has some fascinating deep research articles on AIG. This one, The Rise and Falle of AIGFP:
The Seed Of Ruin Is Planted
- That year, JP Morgan approached AIG, proposing that, for a fee, AIG insure JP Morgan's complex corporate debt, in case of default. According to computer models devised by Gary Gorton, a Yale Business Professor and consultant to the unit, there was a 99.85 percent chance that AIGFP would never have to pay out on these deals. Essentially, this would happen only if the economy went into a full-blown depression, in which case, the AIGers believed, the counter-parties would be wiped out, and therefore would hardly be in a position to demand payment anyway. With the backing of Cassano, then the COO, Savage greenlighted the deals. Credit default swaps were born.
So, it all starts with some seriously bad math but the story continues and really starts to sound like Worldcom to the point the former CEO of AIGFP hired their attorney.
I've got a hint for ya, huge conglomerates. If you only have one consultant and you're risking say....a trillion dollars...
it's a really good idea to get a second opinion, even run some simulations periodically.
Also, while the world maybe shouting "off with their heads" it's good to see some detailed background articles on who is who at AIG so one can discover precisely who caused this debacle.
I personally am thinking few are looking into the finance mathematics, i.e. the quants, and if this business of bad math is not cleaned up....this will happen again.
What was the token phrase about assumptions, they make a what out of you and me?