A.I.G.: The Economy’s Black Hole

How about this for effort? AIG reported this morning that it managed to lose $61.7 billion in the fourth quarter of 2008. Here’s the New York Times report: A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid

Think about that. $61.7 billion in one quarter. Astonishing. Floyd Norris, also at the NYT, has calculated that this means that AIG contrived to lose $465,421 a minute for the entire quarter.

You just have to stand back in awe at the stupendous dimensions of the incompetency that produces a calamity of that proportion. These people weren’t just stupid, they went for the universal gold medal for ridiculous stupidity. It’s breathtaking to think that any of those responsible at AIG for this mess aren’t in jail.

What were they thinking?

Well apparently not much other than how to book fees as fast as possible.

The employees who created the book of business that is now imploding with global ramifications were obviously idiots. But they were the kind of idiots that you only come across in the financial markets. They were immensely self assured and clever idiots. they should all be banned for life from finance and made to sweep streets for the remainder of their miserable lives.

What did they do?

They created a business around a product called ‘credit default swaps’. This little toxic piece of financial jiggery pokery allows traders at a financial company, such as the imbeciles at Citibank, to buy insurance on their low quality assets such that AIG will reimburse for any losses. Hey presto! The low quality assets can now be sold as pristine AAA rated assets because AIG’s rating was AAA [not now I guess!] and it has insured any buyer of those assets against loss. For a very large fee of course.

So far so good.

Both the sets of traders have met their bonus pool goals and can now buy a Hamptons home. Great. But this scheme [scam?] only works in a parallel universe where assets like homes have prices that only ever go up. Who cares about that little detail? Not the traders because they’ve received their bonuses. Not the executives, because they’ve also been paid lavishly and they’ve been lionized in the press fro having delivered fat returns to their shareholders. Not the SEC, who signed off on the scheme [scam] because it was ideologically driven to applaud the innovative power of unregulated markets. Not the Bush administration. Not the rating agencies who kept AIG’s rating at AAA even as the tsunami gathered pace and power. No, no one cared. The indifference to the impending disaster was stunning, but mainly for the fact that no one seems to have realized that it was a monumentally stupid business model with catastrophic potential not just for the investors stuck with the toxic assets that were later proven to be awful, but the public as well. After all we are the ones paying for those jackasses who built the scheme.

As an example of the lunacy that gripped the markets back in those distant days: the appropriate government agency to bail AIG out is the Treasury Department. Did they? No. Under Paulsen they were quite content to let AIG wallow. It was the New York Fed that stepped in to bail out AIG and stop the cascading collapse that would necessarily have followed a default. The Fed has no official jurisdiction over AIG because it is an insurance company. It was the damage that an AIG default would do to the banks that impelled the Fed to act outside its remit.

From the perspective of the worldwide credit markets it is AIG that towers above all else as the center of the disaster.

And that says a lot when you look at the stupidity of the sub-prime mortgage mess. It really takes some doing to one up the mortgage lenders. But as this horrendous quarterly result, and the ongoing bail out operation, demonstrate AIG’s incompetent executives seemed to have pulled off the impossible.

$61.7 billion in one quarter. Now that’s what we call a loss. Makes Citibank seem half-hearted doesn’t it?