What Happened to AIG

2 things: Greed and no Risk Management.

In the past few days Hank Greenberg, the former CEO of AIG, has admitted that the finance part of AIG hurt the business as well as the "dissapearance of Risk Management."

The two are related to the company's over use of credit in the early part of this decade. At the time of failure, AIG's leverage was 60 to 1. There was definetly no risk management oversite to the finance area. This overleveraging was due in part to AIG's issuance of over $440 Billion in Credit Default Swaps. These financial instruments are used to create an insurance policy against bonds for a fee. Issuing $44o Billion in CDS meant quite a bit of revenue for AIG. (If there was any question of how AIG made huge profits year after year in the early part of this century, as it was to many in the industry, including regulators, we now know the answer.) And since now asset backed securities, derivatives, and bonds are all becoming worthless, AIG is responsible for all payments on their CDS. They cannot fulfill these obligations and, in turn, have become insolvent. This means that all the institutions that they sold these obligations to are losing their insurance. If this is allowed to happen it would trigger the end of our financial system as we know it because if AIG fails, many institutions would soon follow. The result was a hesitant government bailout merely to prevent the fallout of such events.