"Bailout" for AIG, but not Lehman Bros. or Merrill Lynch

[Levin]

As I understand, AIG essentially insured the securities based on bad mortgages. That is, investors in these bum securities bought insurance from AIG to cover any losses they would suffer. And as the real estate market tanked, and the securities became worth pennies on the dollar, the losses were huge, and AIG has to cover them. They call them credit default swaps or whatever, but at bottom, didn't AIG just sell insurance to these people who wanted to cover their risk in the event of a crash in the real estate market and a wave of foreclosures? Smart investors to buy the insurance. Dumb AIG to sell it.

[Archaea]

Originally Posted by Levin

As I understand, AIG essentially insured the securities based on bad mortgages. That is, investors in these bum securities bought insurance from AIG to cover any losses they would suffer. And as the real estate market tanked, and the securities became worth pennies on the dollar, the losses were huge, and AIG has to cover them. They call them credit default swaps or whatever, but at bottom, didn't AIG just sell insurance to these people who wanted to cover their risk in the event of a crash in the real estate market and a wave of foreclosures? Smart investors to buy the insurance. Dumb AIG to sell it.

IOW, the actuaries for AIG didn't do their jobs. Way to go Indy.

[Indy Coug]

Originally Posted by Archaea

IOW, the actuaries for AIG didn't do their jobs. Way to go Indy.

I'm curious if this kind of insurance is actually priced by actuaries. It's certainly outside the realm of traditional actuarial work. But whoever was behind it screwed up royally.

[Archaea]

Originally Posted by Indy Coug

I'm curious if this kind of insurance is actually priced by actuaries. It's certainly outside the realm of traditional actuarial work. But whoever was behind it screwed up royally.

Those guys and girls should be outed. Who made these notorious pricing decisions? However, if Levin's description is accurate, what we are witnessing is further fallout from the real estate crisis sweeping the country.

[creekster]

Originally Posted by Indy Coug

I'm curious if this kind of insurance is actually priced by actuaries. It's certainly outside the realm of traditional actuarial work. But whoever was behind it screwed up royally.

I don't hihnk it is underwritten like typical life or casualty insurance. I think they do it more like a resinurance program, where thye look at a markte risk. I think Levin's descirption is accurate, as I understand it. This does all tie back to the housing fiasco.

[Cali Coug]

Originally Posted by MikeWaters

it was so potentially hugely profitable, than no one in the private sector wanted to do it.

How many companies in the private sector have that kind of liquidity? AIG's problem is a cash flow problem. The government has no issues with cash flow.

[MikeWaters]

Originally Posted by Cali Coug

How many companies in the private sector have that kind of liquidity? AIG's problem is a cash flow problem. The government has no issues with cash flow.

the ones that the fed asked to buy AIG or float them. The idea that this was a great business deal with little downside , but that the companies couldn't get the cash to take advantage of it is patently false (and stupid).

[Cali Coug]

Originally Posted by MikeWaters

the ones that the fed asked to buy AIG or float them. The idea that this was a great business deal with little downside , but that the companies couldn't get the cash to take advantage of it is patently false (and stupid).

The government asked multiple companies to collectively float the $80 billion, knowing that none of them could do it individually. As I understand it, negotiations broke down when the companies couldn't resolve how AIG would be split up following the float. The government, as the sole provider, didn't have to worry about that.

[pelagius]

Originally Posted by Jeff Lebowski

We need Pelagius to stop lurking and give us his thoughts.

I just want people to know that I will talking about it on Bloomberg TV today (not really). It has been covered well enough by others. I don't have anything to add.

[SeattleUte]

Titanic Sheep

What this shows me is that all these high paid financial executives have few original ideas. They seem all to have fallen prey to the same fad. They are all going over the same cliff. Management at AIG, Merrill, Lehman and the others were monstrously overpaid and are pulling the rip chord on their big bousy golden parachutes. Capitalism is better than a controlled economy. But it has its imperfections.