Posted by
Bob B on Thursday, June 18, 2009 9:57:09 AM
Was it corruption that brought down AIG ?
No it was not. AIG was brought down by excessive holdings of derivative securities, primarily those known as Credit Default Swaps. It is an over simplification, but one could say Credit Default Swaps are a form of insurance against loss due to defaulted debt, i.e. mortgage foreclosures. They were on the wrong side of a monumental bet.
Was there corruption? Yes, but it was not responsible for the fall. It came after the fall, in an effort to save the company. There is no widely recognized value for these esoteric instruments. They do not trade in a high volume auction market like common stock. AIG continued to value their derivative holdings at prior levels, not recognizing the depleted value on their books.
AIG may not have been squeaky clean but they certainly were not Enron corrupt.
If it wasn’t corruption that brought them down, what was it?
Bad Risk Management.
Was taxpayer money required to bail out AIG ?
No, not one red cent. Polls showed the public recognized this but our politicians did not. In a properly functioning free market system Darwinism prevails. Governments do not infuse capital into companies that engage in failing practices, that’s intervention, not free market. Indeed, taxpayer money was used but it was not required. It was a choice made by elected representatives who, once again, failed to represent our interests.