Word that Benjamin Lawsky has ordered his New York Department of Financial Services to revisit the American International Group Financial Products (AIGFP) madness is deeply disturbing. That is because it may resume the process of turning AIG from its prior role as the equivalent of a 10-carat diamond into an ugly lump of coal — a process stopped by prompt and responsible federal intervention.
The probe is re-examining the risk management practices at AIGFP that led to AIG’s emergency takeover by the Federal Reserve Board in 2008. However, from this vantage point, it appears to be a misstep that will interfere with the ongoing process of righting a huge ship that foundered on the shoals of reckless and mindless decisions of a group far removed from the core business of AIG.
There is no question that AIGFP acted recklessly. It used the balance sheet of a mega-insurance company to speculate in what turned out to be a spectacular housing bust.
AIG had such a dominant position in world life insurance markets that European insurers persuaded their negotiators to contend in the Doha round of trade talks around 2001 that AIG’s AIA Group had an unfair advantage as the only insurer doing business in China that didn’t have to have a Chinese partner. Former Chairman and CEO Maurice “Hank” Greenberg then involved the U.S. Trade Representative in the talks defending AIG’s position, and the European initiative failed. But, it spoke to AIG’s strong competitive position in the world’s fastest-growing market.
AIGFP constituted only 6 percent of the annual revenues of AIG at its peak, according to information provided at several industry meetings. It issued credit default swaps with a notional value of $2.77 trillion and used reserves held in its 13 life insurance units to collateralize speculation in approximately $80 billion in MBS of various grades.
The housing bust, and the ensuing global financial crisis, however, forced AIG to seek federal help, resulting in the need to sell 79.9 percent of itself to the Fed in order to meet margin calls on the credit default swaps (CDS) and therefore escape insolvency.