Michael Lewis On AIG: READ The Entire Vanity Fair Piece

vanityfair.com:

Almost a year after A.I.G.'s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved "the silent, shell-shocked traders of the A.I.G. Financial Products unit"and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.

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Read the whole story: vanityfair.com

Comments

[pastpartisan]

the whole economy is a scam bult on a house of debt waiting to topple.

any so called 'recovery' is artifical

good articles: http://www.alexandria.lib.va.us/link/redir.pxe?www.iamned.com

[dadw5boys]

NEARLY ??????

AIG was bankrupt in August of 2004 !!!!!!

Paulson placed an auditor on the Board of AIG and allowed that Auditor to CREATE MOENY FROM THIN AIR with a simple book keeping entry on AIG Books !!!!

This was Securities Fraud by the head of the U.S. Treasury !!!!

.

[sueno]

Finally someone is talking about
the 'quants' who largely got away
with money and no responsibility
for the melt-down they caused-

[DiogenesOfAlaska]

this is not what the article says. It tells a different story.

It was the quants who suffered from the irrational moods and the lack of openness to argument imposed on them from above, by the manager with Goldman envy.

That's quite a different story. And while it is certainly true that there were quants who really were quacks, the idea that finance can function without somebody fulfilling the job description of a quant is fiction. This has ceased to be possible decades ago. And it doesn't help at all to make all the comparisons to casinos you like. Financial markets do have certain traits of a casino, but the task is to make sure they are run with the necessary caution, not to give in to the temptation that there is such a thing as an economy with nobody placing bets on his or her superior knowledge - with the risk of making losses as a result.

[DiogenesOfAlaska]

Did it ever occur to anyone that the whole notion of financial incentives for people who have already made themselves private fortunes in the hundreds of millions are quite intrinsically meaningless?

Which means: what reason was there to assume that this dictator had any reason to make valid decisions beyond the first couple of years in which he took home tens of millions?

None.

There's no need to consult the Freudian analysts. It's obvious. This guy was angry because somebody else had fancier toys to play with. Not a good idea to put him in charge of a trillion dollars of risky mortgages.

There's a cap on the meaningfulness of financial incentives. And of course there's no theory about this truth. It's a truth about only a few tens of thousand people in human history. But since all the insane wackos are among them, it's still a good enough truth.

[Jannsmoor]

It was inevitable. Until you understand that, you won't understand what happened. America started electing people who actually told us to our faces "government is the problem."
Of course, what they really meant was "government regulation is the problem." Thus, starting under Reagan, came the great deregulation. It followed through Clinton and met its apex under George Bush.
George Bush, like Alan Greenspan, are Ayn Randians. Ayn Rand preached a particularly fiendish economic sermon, namely that only total selfishness is justifiable, empathy is a fault.
So we end up with George Bush appointing Christopher Cox as head of the SEC. Once Bush, Greenspan, and Cox had power, the end was inevitable. None of them believed in regulation, and so there was none. The only question was the size of the destruction to the middle class.
AIG sold unregulated derivatives through an unregulated Financial Services unit to insure unregulated forms of debt obligations generated by a largely unregulated mortgage market. We have the inevitable result.
If you study US economic history, you will read this story over and over. Failure to regulate ALWAYS leads to financial crises. Study history and you will realize the business cycle is a myth. It is just one financial scam crashing after another.

[CaptainFailmore]

Whew, that was a long read! A fascinating peek into what was really going on inside AIG as well, and I have to say that while some accounts of the story brought to light details that I didn't fully expect, I'm not surprised.

To recap, Joe Cassano was a corporate tyrant who was plainly unqualified for his job. He groomed an army of yes-men using a potent combination of intimidation and reward, and insisted that the risks his unit within the company was taking remain underestimated. Even as it was becoming - or at least should have become - abundantly clear that the so-called 'machine' that was running AIGFP needed a serious tuneup, nothing changed thanks in no small part to this man. The breakdown that followed and the disastrous consequences which came after are history.

What's most striking to me is that according to this article, to Cassano it wasn't the money that mattered so much as the power. He sounds like a real character, like something you'd see in a Dilbert strip. Equally striking and very telling - not to mention a grievous blow to Free Market ideology - is the willingness of other Wall Street firms to imitate AIG's 'machine', down to the willful ignorance of the resulting system's untenability. There are plenty of rats involved, to be sure, but it seems the bulk of our economic leadership - both in the industry and in government - consists of lemmings instead.

[The Meek]

Yes they are and we are lemmings indeed.

[pros54]

What is so amazing is that nurses with their pay which is meager compared to what these traders make and ability to survive short periods of joblessness is so small again compared to these people still do stand up to Doctors and voice their opinion where they feel that things are not right. The problem is societal. The middle class orr shall I say the professional class is so much dedicated to staying in luxury that they do not believe in anything except what keeps their position no matter how much the invoke belief in God. That is what has facilitated the malfeasance of our government and legislatures see people like Powell, Tenet in the Bush administration. Nobody wants to fall out with the person in power.

[CaptainFailmore]

Exactly, and if anything, the anonymous employees quoted in the article say just that. If it wasn't for the huge monetary rewards they were receiving under Cassano, they wouldn't have put up with him. They hated his guts, they knew he was running AIGFP into the ground faster than you can say, 'China, here I come,' and the handwriting was on the wall everywhere they looked. Instead of actually organizing and taking Cassano on, which I got no indication they couldn't have, they stayed mum about it and succumbed to his 'reign of terror' because if they got fired, their lucrative careers in finance would be over.

However, your example is also a little skewed. Nurses work directly with patients every day. They know what these people go through and how their actions as caretakers affect them. In other words, they're at ground zero any time something goes wrong, and if their bosses cause harm to their patients, of course they're going to be more inclined to speak up about it. How distant were these traders from the actual, final results of their actions? Does finance seem, on its surface, to be a life and death matter? That's moral-hazard in action, and it's no small part of what wrecked the finance industry. If you don't risk anything for what you do, and don't actually see (or willingly ignore) the consequences of your actions, reckless behavior becomes considerably less ugly.

[butterfliesblossom]

This article is the best example of what Joseph Stiglitz was trying to communicate when he stated " Today only the deluded would argue that markets are self-correcting or that we can rely on the self-interested behavior of market participants to guarantee that everything works honestly and properly”

Humans are fallible and that is why we need regulation. The problem is that regulation is often political and that is cause for some concern as well since Congress can be bought. But let’s get past that for a minute and consider the other reason why AIG fell. It was readily admitted that many of these traders who knew better did nothing because they had too good of pay; which is the best argument for pay caps. Steven Pearlstein at Washington post stated "No matter how it is structured, pay at such astronomical levels has a tendency to swell heads, inflate egos and tempt people to take undue risks of all sorts, ethical as well as financial"

One fallible man with the ability to pay astronomical sums to traders manage to convince them to be unmoral and look the other way and that is what caused this economic crisis.

Write congress at www.house.gov or www.whitehouse.gov . We need regulation, we need pay caps.

[fifty8]

Despite some shedding of risk here and there, every single one of the five largest derivatives players is still grossly overexposed to defaults by trading partners: Bank of America has total credit risk in this sector to the tune 169 percent of its capital; Citibank, 216 percent; JPMorgan Chase, 323 percent; HSBC Bank USA, 475 percent; Goldman Sachs, a whopping 1,048 percent, or over TEN times its capital.
If we were back in early 2007... before the collapse of Bear Stearns, Lehman Brothers and Merrill Lynch... before the implosion of Fannie Mae and Freddie Mac , or before the near-collapse of AIG and Citigroup... then, maybe, folks could get away with ignoring this sword of Damocles hanging over the financial markets.

http://www.marketoracle.co.uk/Article11825.html

[brandnewstuff]

well lets hope my words get out to others...about classaction lawsuit fraud and IPOs

[basta]

I get the feeling that AIG is the patsy, the LHO for the real killers, Goldman Sachs.

[outnow]

There are good derivatives and bad derivatives. The Masters of the Universe know what best for you. It is not ours to question why but just to accept whatever they say. They are so much smarter and richer, too. Plus, they have friends in Washington. GS has the touch on Obama - the Golden touch, it seems. Charles Dickenson couldn't have named the firm better: "Gold Man Sacks" the economy for their own profit.

[djwfutbol]

The (only) upside to all this is that Michael Lewis and Matt Taibbi are on the case. They should both win Pulitzer prizes before they are through.

[TJCole]

We should have Nationalized AIG for sure so we knew what was going on with it, along with the other out of control corrupt banks that are constricting our economy and paying out big bonuses for failure...!

[LunaPark]

We should have let AIG fail. AIG was run into the ground. Businesses that suck, should be allowed to fail. It is not a free market if we don't allow them to fail. Unfortunately, the Federal Reserve, and Tim Geithner have scared us into believing AIG and the banks were too big to fail, just like Bush et al scared us into invading Iraq.

[research]

Credit default swaps were paid off by TARP funds and continue. If you don't understand this investment insurance without reserve scam, you don
't know what's going on. See my profile for details and links.

TARP bank Bailout are bad,

Direct investment in Main street via gov orders is good.

[pastpartisan]

We are borrowing the stimulus money. More stimulus is equivlent to throwing gasoline on the fire. We can't possible pay the debt back... legitemately. The government will use inflation to cheapen the debt. Unfortuneatly, this will hurt the poor, the working class, and the elderly on fixed income. Reckless government spending is not a Liberal value. http://www.alexandria.lib.va.us/link/redir.pxe?www.iamned.com

Stimulus is a joke of a concept; it doesn't end up with real economic growth in the long term. Even the New Deal failed to increase private investment. It wasn't until 1941 that domestic private investment reached 1929 levels. The fact that the first stimulus has failed to stop the bleeding yet isn't surprising. Our government deficit for the year which is over 20% of GDP (when the omnibus bill, first stimulus, bailouts, and on-budget deficit are summed) is unsustainable and something's gotta give, whether it be the lenders or the interest rates.

hat tip to http://www.alexandria.lib.va.us/link/redir.pxe?www.iamned.com

[jsgaetano]

Politically, Obama can't be fiscally responsible.

The cycle since Reagan has been- "fiscal conservative" comes into office and deficit spends like the money is going out of style. This handicaps the next Democrat to come into office, since the Democrats care about America and the Republicans don't. So, the Democrats make whatever hard decisions need to be made to fix the problems, whether it's raising taxes or cutting military spending or whatever... which plays into the hands of conservatives, who whine about the Democrat's fiscal responsibility.

This has happened over and over and over. Finally, we have GWB come into office and outspend EVERY US PRESIDENT COMBINED. You know, a REAL fiscal conservative. So realistically, Obama has to do whatever he can do, without raising taxes or cutting spending. Until the root problem is fixed (getting conservatives out of government), no real fixes of the economy can be undertaken. And besides, the 30+ years of fiscal mismanagement by conservatives can't be fixed in eight years anyway.

For America to survive, conservative ideology must die.

[The Meek]

Most people inherit their political affiliation. I grew up with Republicans, they aren't bad people, but they are stubborn. They do not want to see that their party was hi-jacked by sociopaths. They need a way out that doesn't cause them to lose face. They need a leader that is cautious, tactful ,able to explain things clearly and looks good on TV.

Yes, the democratic party has way to many narcissists also.

Why do we let these people run our lives?

[outnow]

This was a Ponzi scheme with a nicer sounding name. The wealth created was all on paper. In a reverse leveraging cycle, the destructive effect is not "creative" in the normal sense of market discipline. With the bailouts of the zombie banks and their virtual monopolies on credit and currency, even monetary policy, there will be severe repercussions and the most massive shift in favor of certain creditors who were able to remove the loans from their balance sheets.

Playing monopoly with one player being able to create money out of thin air on leveraged assets marked to fantasy levels challenges the very idea of fiat money and fractional reserve banking in the globalized context. There are no rules of the road other than those with the best connections in Washington for their mega-banks win. Since unlimited development of the planet is not sustainable, they might as well cash in before all hell breaks lose.

The Savings and Loan and Junk Bond era transitioned into the so-called Pump and Dump finally the Credit Crisis. It was all about Wall Street scams and greed.

For once, I agree with the Pope whose recent statements confirmed that the real religion in America and elsewhere is greed, not the message so often preached of charity. Profit should be for some good purpose, says the Pope. I have to agree.

[jsgaetano]

If Der Popenfuhrer is so smart, why is the Vatican running a deficit?

[Rule Of Law]

Ran out of countries to conquer in the name of gawd?