What was AIG doing?

The more I hear about what AIG used to be doing the more I\’m wondering what in heck was going on there?

The suit, which was filed in New York, alleges Bank of America conducted a \”massive fraud\” over the sale of mortgage-backed bonds to AIG before the crisis.

The insurer, whose $182.3bn bail-out was the most controversial of all the rescues during the crisis, accuses businesses owned by Bank of America of \”grossly misleading\” AIG over the riskiness of loans used in the mortgages.

What?

Through the London basde AIG Financial Products part, AIG was the major insurer of those bonds against default. And OK, I know they thought they would never default, that such insuring was money for nothing. Which might make it seem logical that other parts of AIG thus bought those very bonds because they thought they were safe.

But that\’s absurd behaviour for an insurance company. Double exposure to the same risk?

What were they doing?

Well, going bankrupt, obviously, but then that\’s why they shouldn\’t have been doing what they were.

2 thoughts on “What was AIG doing?”

  1. So an Insurance company can sue its client on the grounds that an Insurance company cannot be expected to know how to measure risk. Have I got this right?

  2. Surreptitious Evil

    Were BoA AIG’s client for the sale of the bonds? Or was it the other way round?

    So, we have a purchaser of financial products suing a supplier thereof for something akin to gross misrepresentation.

    That a separate bit of the company was selling products related to the supplier based on a detailed (if fundamentally flawed) analysis of the risk may be absurd (I also think it is) but there may even have been deliberate, regulatory required, ‘chinese walls’ in place.

    Certainly something the group risk function should have picked up on.

    Tim adds: John Hempton (Oz fund manager) has written often that Hank Greenberg *was* AIG’s group risk function. When Elliot Spitzer prosecuted and got him thrown out, that’s when AIG began to fall apart. Because they didn’t have a group risk function other than the man who had built the company.

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