10:49 AM

FT Anger on AIG Bailout

Excellent analysis of AIG bailout and the US/global financial crisis from an angry John Gapper at the Financial Times:

Some extracts from: This greed was beyond irresponsible

I have a fine seat in the FT’s New York office looking down the canyon of Sixth Avenue towards the banks of Midtown. From my perch, I have watched the flabbergasting events of the past week.

My initial reaction was excitement – what a time to be observing Wall Street for a living! This steadily gave way to bafflement, fear and finally, after the US government’s $85bn (£48bn, €60bn) bail-out of AIG , anger.

. . . For want of an alternative, the Fed has now become that central bank. This alone is a mess. At least when the Fed rescued Bear Stearns in March, it could turn itself into the de facto regulator of investment banks. But insurance groups are supervised – absurdly – by a network of state regulators. What happens now?

Mr Paulson is not only picking up the bill for the states. He is also doing a favour for European governments, whose banks would have been hit. Many of AIG’s toxic insurance contracts linked to subprime CDOs were sold to European banks to allow them to treat the securities they held as double A rated.

Given that AIG was helping them to dodge Basel I capital requirements by taking out flawed insurance contracts, it is not surprising that confidence and interbank liquidity have collapsed. A spike in Libor and the need for Lloyds TSB to take over HBOS are two consequences.

. . . We are now, unquestionably, in the worst financial crisis since 1929. We do not know how many more banks and institutions will fail – Washington Mutual, the US counterpart of HBOS, is under severe pressure – but Bear Stearns, Fannie Mae and Freddie Mac, Lehman and AIG are plenty.

There are lots of people and institutions to blame for that, from regulators to mortgage brokers to, let us admit it, all of us who decided to speculate on house prices.

But AIG takes the biscuit. Here was a huge multinational insurance group with a reputation for solid underwriting and risk management that decided to diversify from insuring risks it knew well – car crashes and fires – to covering derivatives it did not understand.

Of course, it thought it understood them. In presentations to investors this year, it emphasised how thoroughly its AIG Financial Products arm assessed the risks of insuring CDOs. It ran all the data and decided that, in the worst case, it risked losing $2.4bn on the portfolio.

Well, $24bn of write-downs later – a mere 10 times its maximum estimate – the company has burned through its equity, spread financial chaos to all corners of the earth and humiliated the US Treasury. The job of insurance companies is to guard others against catastrophes, not cause them.

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Please see SVW:

Silicon Valley and Wall Street: We're Not Immune - Here's Why