Friday, September 25, 2009

Risk held at AIGFP was not a surprise

Gillian Tett is going way out of her way to avoid admitting that she (or any financial journalist, really) could have and should have known that AIG Financial Products was holding a substantial portion of the risk in the credit derivatives market. In today's FT, she argues that the opacity of the CDS market prevented anyone from knowing about the huge risk concentration at AIGFP in advance. I won't deny that the CDS market is opaque and that more transparency is needed, but the risk concentration at AIGFP was neither a secret nor a surprise—and it certainly shouldn't have been a surprise to a financial journalist who is supposedly an expert on the credit derivatives market. The "hoocoodanode?" card won't play on this one. Tett cites a Fitch survey of the CDS market from 2007 to make her point about AIGFP:

[W]hat is ... striking is that a well-respected Fitch survey before the collapse of the credit bubble suggested that AIG was just the 20th largest credit default swap player in the sector, based on gross notional outstanding volumes. No wonder those billions of lossmaking contracts subsequently came as such a shock.
Tett is being very disingenuous here. First, not until a few paragraphs later does Tett admit that the 2007 Fitch survey was ranking counterparties by gross notional rather than net notional amounts. The Fitch survey wasn't wrong—AIG was only the 20th largest counterparty in the CDS market by gross notional amount. What's wrong is to suggest that a ranking of counterparties by gross notional amount is the same as a ranking of "the largest players in the CDS market." More importantly, though, what Tett conveniently fails to mention is that this very same Fitch survey clearly explained that AIGFP was the 800-pound gorilla in the credit derivatives market, and that by the end of 2006, AIGFP had sold a net total of $384 billion in CDS protection. From the 2007 Fitch survey (emphasis mine):
Global Insurance The global insurance/reinsurance sector, representing principally AIG Financial Products, remained a large seller of protection, registering an aggregate gross sold position of USD503bn. On a net basis, the sector stood at USD395bn sold, up slightly from the USD383bn tallied at year-end 2005. Structured finance synthetic CDOs and corporate synthetic CDOs accounted for 93% of the sold volume. In terms of quality, of the total gross amount sold, 93% was in the super-‘AAA’ segment, versus 91% reported in last year’s survey.
In addition, 68% of the tenor sold ranged from one year to four years (compared with 44% at year-end 2005) though that was driven by AIG’s dominant “footprint” in this market. Excluding AIG Financial Products’ sizeable position, the global insurance industry had a net position of only USD11bn (USD21bn gross sold), down from the USD15bn (USD29bn gross sold) compiled at year-end 2005. Some of the decline can be attributed to a smaller sample than in the previous year.
By product on a sold basis, single-name CDS consisted of 63% of the volume, while corporate synthetic CDOs and structured finance synthetic CDOs made up just 16% of the total. Similarly, the credit profile, excluding AIG, of the industry changed, with ‘BBB’ representing 40%, ‘A’ at 35%, and ‘AA’ at 10%, while speculative grade represented 8%, and ‘AAA’ 6% of the notional amount sold.
The Fitch survey—which is publicly available (with a free Fitch account)—was published in July 2007, and was very well known in the markets. If you're a financial journalist covering the credit derivatives market, there's no excuse for not knowing about AIGFP until September 2008.


anne said...

So if "the risk concentration at AIGFP was neither a secret nor a surprise" - and if Gillian Tett should have known all about it, what's AIG's excuse for not understanding the risk they held?

Economics of Contempt said...


AIGFP's excuse, or the real reason? ;)

Their excuse seems to be that it was all Joe Cassano's fault.

I doubt we'll ever truly know the real reason. My sense, from talking to people in a better position to know than me, is that it was a combination of AIGFP: (1) not understanding or particularly caring about the declining underwriting standards in the subprime market (a mortgage was a mortgage to them); (2) not fully understanding how the (somewhat new) collateral posting process on these trades worked; and (3) old-fashioned excessive optimism.

The mistake that the people who knew about the risk concentration at AIGFP (myself included) made was assuming that AIG was a modestly sophisticated financial institution, with a non-dysfunctional risk management system. It turns out they lacked both sophistication and a functional risk management system. Could we have known about this in advance? I've never looked into it, but my guess is that we could've at least known about the problems with their risk management. I highly doubt that any institution could've known about the collateral posting requirements on all AIGFP's trades with other counterparties though.

Best Bank Rates said...

Even by having lots of discussion on AIGFP, we will never get the real reason from it.

Anonymous said...

The Gene Park story makes sense to me.

Would love to see a comment on Alan Grayson's latest camera time at Barney Frank's hearing.

Philip Crawford said...

If the report was well known, which I don't doubt, why did AIG equity price hold up so well throughout 2007? I remember lots of discussions in the comments section of CR guessing who the CDS bag holder was going to be and I don't recall a consensus on AIG. (The consensus was always the tax payer. heh)

I guess that is what you're saying in your comment. We knew they had exposure, but assumed they were properly managing it. Even with that said, it still seems the stock price should have been hit from this exposure before the start of 2008.

Anonymous said...

AIG's stock price remained high because its investment strategy was actually rational from the perspective of shareholders. By simultaneously selling credit default swaps linked to subprime mortgages and buying lots of mortgage-backed securities for its own investment portfolio, AIG transferred expected wealth from its creditors (and taxpayers) to its shareholders. See

Anonymous said...

I think you miss Tett's point that the really worrisome questions are: Who is selling CDS now that AIG is out of the picture and do the Central Banks have the data they need to monitor the situation?

Anonymous said...

If the risk held at AIGFP was indeed not a surprise to anyone trading in the CDS market, then can we assume that AIG's counterparties deliberately caused a systemic collapse of the CDS market?

Anonymous said...

@ Philip Crawford
@Anonymous 10:53 am

Re: AIG's Price - It actually did not "hold up well." I know this because I was shorting it.

I don't know when in July 07 this report came out - but the early July price for AIG was about $70/sh. The late July price was about $64/sh. It did bounce around either side of $65/sh. until late October and then it went on to sniff the lower 50s before settling around $58/sh. for the year.

Using the end July price, it was dropping at about a 20%/yr. pace. Using the early July price, it was dropping at about a 30%/yr. pace.

Pretty tame compared to what was to come, but far from holding up well. Before the reverse split, the float for AIG was about 2.5 bln shares - so it takes awhile to move a stock like that. Also, the report was "out" - but possibly not widely read or discussed. I don't think Maria Bartiromo or Larry Kudlow spent a lot of time talking about this - assuming they were even aware of its existence.

The price action at that time was, IMO, consistent with institutional liquidation. More big money going out the door than coming in ...


Anonymous said...

Whole body theDiablo 3 Items those who believed with regards to the possibility concentration at AIGFP (personally included) produced was in the event that AIG became a modestly superior loan company, using a non-dysfunctional chance administration technique. It turns out they was lacking both equally complexity plusBillig WoW Gold a purposeful chance supervision technique.

Unknown said...

Nice information, valuable and excellent design, as share good stuff with good ideas and concepts, lots of great information and inspiration, both of which I need, thanks to offer such a helpful information here. | | | | | | | | | |

Trần Duy Thuận said...

Trần Duy Thuận Blog đang cần nhận gia công tại nhà. Ai có cần người nhận gia công tại nhà tphcm liên hệ mình nhé. Truy cập vào đặt vé máy bay giá rẻ vietjet để có thêm kinh nghiệm khi đi máy bay nhé.

Rita Vianty said...

Your blog is very cool. I am very lucky to be able to come to your weblog agen ibcbet and I will bookmark this web page in order that I could come back another time.Keep up the good work. I have never read more interesting articles than yours before. You make me so easy to understand, agen sbobet and I will contiune to share this site. Thank you very much! Thank you so much for the post you do. I like your post and all you share with us is up to date and quite informative. i would like to bookmark the page ibcbet so i can come here again to read you, as you have done a wonderful job.

Anonymous said...

Anda ingin tau tentang kesehatan wanita? kesehatan reproduksi wanita? kesehatan organ intim wanita? Ingin Tahu Lebih Rinci Tentang Keaslian Crystal X?. Anda dapat mencari tentang kesehatan di situs ini, anda juga mendapat informasi tentang CRYSTAL X ASLI Murah! Hanya Rp 65.000,- Ayo Buruan!. Selain tentang kesehatan organ wanita, anda juga dapat menemukan tentang bahayanya bagi kesehatan yakni 5 Efek Samping Crystal X. Agar tetap sehat dalam memakainya, pastikan membaca Tanya Jawab Tentang Crystal X. Jangan abaikan kesehatan organ intim, dapatkan info melalui Tentang Crystal X Asli NASA. Fakta-fakta yang membuat anda sehat juga dierlukan Fakta Tentang Crystal X Asli NASA . Jangan lupakan efek samping agar miss V tetap sehat dan bersih, baca 5 Efek Samping Pemakaian Crystal X. Lalu jika produk ini terjatuh Crystal X Asli NASA Terjatuh dan Patah. Pastika juga demi kesehatan anda, anda memastikan bahwa itu adalah Crystal X Asli NASA. Anda juga bisa membaca tentang 5 Ciri-Ciri Keputihan Karena Penyakit Berbahaya. Lalu caramengobatinya juga tersedia Cara Mengobati Keputihan Secara Cepat dan Praktis. Masalahnya adalah apa dampaknya untuk kesehatan Crystal X, Dampaknya Bagi Kesehatan?. Apa tanggapan mereka, Mereka Yang Sudah Pakai Crystal X. Jadi makanan yang harus diperhatikan bisa dibaca disini Makanan Yang Harus Dihindari Penderita Keputihan. Jangan lewatkan juga testimoninya Manfaat dan Testimoni Crystal X Asli. Apalagi yang satu ini Crystal X Asli dari PT. Natural Nusantara (NASA). Untuk mengetahui manfaatnya bagi kesehatan Apa sih Manfaat dan Fungsi CRYSTAL X ASLI?. Pokoknya ada di situs kesehatan organ intim/miss V bagi wanita disini crystal x. Kalau sudah, cara ordernya disini Cara Order crystal X. Tambahan info untuk Anda semua, Cara Mencegah Kanker Serviks.

jaring pengaman said...

Nice article, thanks for the information. It's very complete information. I will bookmark for next reference
jaring futsal | jaring golf | jaring pengaman proyek |
jaring pengaman bangunan | jaring pengaman gedung

Unknown said...

dulunya kencing nanah sekarang ada kutilnya
obat kutil
obat kutil apotik
obat kondiloma akuminata
kutil di kemaluan,cara mengobatinya
obat kutil kelamin tradisional
obat kutil kelamin tradisional
obat kutil kelamin tradisional
obat kutil kelamin tradisional
obat kutil kelamin tradisional
obat kutil kelamin tradisional
obat kutil kelamin tradisional

Heni Herbal said...

Survivors move back admin? Thank you for presenting the information very interesting
Obat Alami Infeksi Saluran Kemih Paling Ampuh
Obat Alami Penyakit Ginjal Paling Ampuh
Obat Alami Ginjal Bengkak Paling Ampuh
Obat Alami Penyakit Jantung Paling ampuh
Pengobatan Alternatif Migren Secara Alami

Unknown said...

Di Sekitar Penis Tumbuh Kutil ? Obatnya Apa ?
Berbahayakah Kutil Kelamin
Penyebab Kutil Kelamin Condyloma Acuminata
Tanda-Tanda Kutil Kelamin Condyloma Acuminata
Obat Kutil di Batang Zakar
Obat Kutil Di Kemaluan Wanita | Penyakit Kelamin Wanita
Obat Penghilang Kutil Kelamin
Tanda-Tanda Kutil Kelamin Condyloma Acuminata Di Bibir Vagina
obat jengger ayam untuk wanita
Kutil Di Alat Kelamin Serta Cara Menghilangkanya
obat kutil kelamin tradisional
Obat Kutil Pada Memek | Cara Menyembuhkan Kutil Pada Kemaluan Wanita
Penyembuhan Kutil Di Bibir Vagina | Penyakit Kelamin Kutil
Penyebab Kutil Kelamin dan Cara Penyembuhanya
Tanda-Tanda Kutil Kelamin Condyloma Acuminata Di Bibir Memek
Cara Menghilangkan Kutil Di Kemaluan | Vagina, Anus, Atau Penis Tumbuh Kutil

Unknown said...

Obat tradisional sipilis paling manjur
Obat sipilis Terbukti Manjur
Jual Obat sipilis Herbal Yang terbukti Manjur
Obat sipilis Herbal Yang Manjur Tanpa Ke Dokter
Obat sipilis Paling Manjur dan murah
obat sipilis yang terbukti manjur
artikel obat penyakit sipilis pada pria
obat penyakit sipilis pada pria
obat herbal alami sifilis
obat alami buat sipilis
obat alami buat penyakit sipilis
obat alami untuk menyembuhkan sipilis
obat alami menyembuhkan sipilis
obat alami mengobati sipilis
obat alami menghilangkan sipilis

Cara Mengobati Asam Urat Secara Alami Dan Cepat said...

thanks for information.
article very nice..

Anonymous said...

Disini akan kami jelaskan manfaat dariCrystal X Mengatasi Keputihan yang sangat berguna bagi wanita terutama bagi yang telah berumah tangga. Selain mengatasi Keputihan Produk ini juga dapat Crystal X NASA Merapatkan Vagina and Crystal X Asli Mengatasi Miom dan Kista. telah terbukti dan teruji secara klinis. selain Crystal X Anda juga bisa mendapatkan Produk hjerbal lainya Seperti Collaskin Pencerah Wajah Herbal dan Ayla Breast Care Pembesar Payudara Herbal yang tentunya sangat berguna sekali bagi ladys yang ingin mempercantik dirinya baik wajah maupun bentuk tubuh karena dengan Mengencangkan Payudara dan Membesarkan Payudara anda akan mendapatkan bentuk tubuh yang ideal tunggu apalagi. anda juga bisa mendapatkan solusi tentangSeputar Kanker Serviks and Penyebab Kanker Serviks. serta Crystal X Obat Keputihan Cara Agar Cepat Hamil

Cara Efektif Menambah Tinggi Badan Secara Alami said...

Given this information very helpful at all, thank you.

Unknown said...

Agen BandarQ


Inilah Manfaat Dan Kegunaan ID PRO Di Permainan Situs BandarQ !

Bokep Online Terbaru

Kumpulan Film Semi

Bandar Poker Terpercaya said...

The article on this site is very interesting, thank you
Selamat datang di LENOVOPOKER™ Top 1 Judi Online
Promo Terbaru LENOVOPOKER :
- Bonus New Member Depo +20%
- Bonus All Member Next Depo +5%
- Bonus All Member Refferal 30%
- Bonus All Member Rollingan 0.5%
Contact : BBM : LENOVO88
WA : +6281375260652
Agen Domino 99
Bandar Poker
Agen Ceme
Bandar Ceme
Judi Poker Terpercaya

nanna888 said...

ระบบ ฝาก-ถอน ที่รวดเร็วขึ้น Line ID : @928bets แล้วท่านจะได้พบกับช่องทางเข้า 928bet มีเจ้าหน้าที่คอยบริการตลอด 24ชม.