Some thoughts on AIG's confidence game.

This is a comment I left over at Jonathan Schwarz's blog, A Tiny Revolution. Primary post by Schwarz is here. Comment thread is here.

Below is the full text of my comment. I just posted it at 4:00 PM EDT. I'm curious as to what comments will follow.

This whole post is cross-posted at my blog here.

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Does anyone dare to wonder whether AIG's "tanking" is a long-con?

I spent a decade as an insurance lawyer in the NYC area, working for --among other clients-- AIG and its many subsidiaries. My particular expertise was and is in the realm of insurance company regulation, and insurance company corporate transactions -- acquisitions and sales of subsidiaries, mutualization/demutualization, corporate reorganization. In my travels I learned that AIG became the world's leading insurance conglomerate through the ruthless business model crafted by its father, Maurice "Hank" Greenberg. The model was to be extremely conservative on all of the financial aspects of the insurance company's operation. Specifically, to be tight-fisted on claims payment, to be over-cautious on the investments side, and to be very careful on the reinsurance of the company's accepted risks.

The news that AIG was tanked by unforeseen volatility in credit default swaps causes me to laugh louder than I have in a long time. Why? CDSs are highly volatile, unpredictable vehicles and their volatility is both their primary character, and why they were created. No competent business person dealing regularly in CDSs would be likely to fail to appreciate their volatility. Hank Greenberg wouldn't fail to appreciate it. The typical AIG employee wouldn't fail to appreciate it.

CDS risks on the insurance side would be laid off on reinsurers, as part of the AIG company at issue's reinsurance portfolio.

CDS risks on the investment side would be countered with hedges of a very conservative nature, in an amount equal to utter failure of the CDS investments.

Those are the principles on which AIG grew, and on which it operstes.

How, then, can I believe that AIG was tanked by CDS volatility?

I can't.

No informed insurance industry expert should believe it.

Unless he/she is paid nicely to believe it.

What does AIG have that the Fed Govt would want? Well, Hank Greenberg's background is CIA work (OSS, actually... CIA's forerunner). And, writing business coverage for many international businesses gives the AIG underwriting divisions a whole lot of valuable information on any business entity -- information that would be highly valuable to that business's competitors.

AIG and the CIA have been intertwined for decades.

So with all that... you tell me. How was AIG undone by CDS risks? Was that actually what happened?

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Interesting related thoughts on AIG by James Abourezk here. Well worth reading.