Hey there behemoth insurer,
Sorry, I usually try to keep such language to a minimum on this blog, but you’ve really gone out of your way to earn it. You are a special case AIG. As if it wasn’t bad enough that I keep seeing these ads of yours on TV--these appalling, clueless, self-serving spots where you talk about how you paid back your bailout money and have suddenly transformed into a public-minded protector of the American people, boasting about helping to rebuild Joplin and
Honestly, guys, our jaws are on the floor. You are one of the great corporate villains of our time—up there with the likes of Enron. To remind readers: AIG is not just the company that eventually got $182 billion in taxpayer bailout money while simultaneously dishing out $165 million in bonuses, including to the people who wrecked the company. It's also the company that perfected the credit default swap, one of the most profitable, dangerous, and useless derivatives ever, and then sold them every which way all over the world.
A credit default swap is basically a bet. When company A buys company B's bonds, Company A can also buy insurance against company B defaulting. The genius is you don’t need to have any vested interest in a company, which is called a “naked” credit default swap. It’s like if I just started taking out fire insurance on random people’s houses. It’s like casino gambling for people too rich to go to casinos. The CDS is the product of the deregulatory Commodities Futures Modernization Act of 2000, signed by Bill Clinton and endorsed by Treasury Secretary
The government had no choice but to rescue you, AIG, lest you bring the entire world financial system down. You underwrote $3 trillion in swaps and had exactly $0 in reserve against potential claims.
You can see why this line of business would be enormously lucrative. It's as if Lehman Brothers had come to college-age Steve Markley, who was bonging beers and throwing cinderblocks around in his backyard and said, "Hey, can we buy insurance against Bear Sterns failing? Let's say $100,000 worth, but if they fail you owe us $10 million."
And I would have said, "Of course! Regulations don't necessitate that I actually have money in my bank account to sign this contract. So please, do fork over that hundy-grand and let's buy some more Natty Light. Bear Sterns will never fail anyway! That's a venerable institution right there."
And I would have gone back to barfing tequila and having no responsibilities, much like AIG did.
Though most of these derivatives got moved on to open exchanges by Frank-Dodd financial reform legislation, there were many exemptions and the CDS remains an insurance policy that isn't regulated like an insurance product. There is still no reserve requirement.