From May 2008 the banks refuse to lend him

It is on a corner of the kitchen table that everything started. The kitchen of the apartment of Howard Sosin, thirty-five years, on the Upper East Side, Manhattan. This is that the former trader for Drexel Burnham Lambert had developed his battle plan, in the spring of 1986, with two of his colleagues, Randy Rackson, thirty years, passionate art and computer science, and Barry Goldman, holds a PhD in economics. A year later, the trio was dealing with "Hank" Greenberg, the legendary boss of American Insurance Group (AIG), by signing a joint-venture agreement, January 27, 1987. Who could imagine that this small subsidiary AIG Financial Products, including another former of Drexel Joseph Cassano will take over the head in 2001, would become the monstrous laboratory of the rout of the world leader in insurance

"The AIG debacle is the iconic story of a subsidiary which is out of control and its parent to bankruptcy by speculating in a crazy manner," summarizes Pierre-André Chiappori, Professor of Economics at Columbia University. In allying with AIG the insurer in triple note has to create their company originally based in Connecticut, the idea of the three ex-Drexel was especially to exploit growing deposit products by offering their customers the means to cover against rising interest rates and currency fluctuations. As early as 1990, Financial Products had opened offices in London and Tokyo and had even a banking subsidiary in Paris to facilitate its European transactions. Over time, the laboratory of Connecticut became very profitable. After the departure of his trio of founders, a subsidiary of AIG, that the "Washington Post" then compared to a "chameleon", starts to more than double its profits of $ 140 million in 1995 to 323 million in 1998, while still minimizing risk taking.

Relaxation of the control of risks

Everything will change with the arrival of Joseph Cassano at the head of AIG Financial Products in 2001 and his jump in the world of "credit default swaps" (CDS), sort of an insurance contract where the seller of a swap undertakes to reimburse the purchaser its losses because of the failure of a third party. The son of a "COP" of Brooklyn, Joseph Cassano, hard worker is an excellent accounting and back office specialist. From 2005, AIG Financial Products going to body lost in insurance products. Dismissed in 2005, Maurice Greenberg ensures that the drift is subsequent to his departure and coincides with a relaxation of control of the risks. One thing is certain: the patron of the London-based subsidiary, Joseph Cassano, will leave office in March 2008, not without having cashed 67.8 million in salary and bonuses over the past two years.

By selling to the subscribers of CDO ("collateralized debt obligations") of "credit default swaps" (CDS), AIG provides against a decline in the value of the product. In 2008, AIG has already sold to 446 billion of CDS, including 307 billion dollars in foreign banks. A pharaonic sum. The total market of CDS, that Warren Buffett has described as "weapons of financial mass destruction", is estimated by some experts to an astounding 62 billion. Is not a Bank, AIG was not to worry about banking regulation in force or to cover any losses of its portfolio. In addition, the insurer was prepared to compensate customers with collateral, in the case where the value of the insured product decreased (competitors preferred to wait until there is a proven real loss) and if its own credit rating (initially AAA) had to be degraded. Bad luck for the insurer: two contingencies occurred.

The financial crisis starting profiler from the summer 2007, insured by AIG products see their value plunging and the insurer must respond to the calls of margin of its customers. From May 2008, the banks refuse to lend him. September 17, 2008, federal authorities take 80 of the capital of the insurer in exchange for a bridge loan of $ 85 billion. This is the first step in nationalization which does not say his name.

In the last quarter of 2008, the drift of the American banking system still affects the disastrous situation of AIG which displays 99 billion of losses on the year. An absolute record. The Government had injected back four times in the capital, for a total of $ 180 billion. By mid-March, the revelation of 165 million dollars in bonuses to some 418 employees of AIG for 2008 is the water drop that straw. How can we dare to want to reward with the taxpayer money those who have contributed to wobble the global financial system Branch of AIG relied on the mandatory nature of the contracts negotiated before the rout. But the true scandal lies elsewhere: it is the bankruptcy of any regulation.

Officially, AIG Financial Products was submitted to the control of the Office of Thrift Supervision, the Agency American control of savings, the authorization of the creation of a banking subsidiary, Bank AIG, in Paris in 1990 by the Banking Commission had allowed him to open a branch bank in London. The mother House of the Delaware is not a Bank, AIG FP was able to escape the effective regulation of the FSA in London. For Donn Vickrey, the founder of Gradient Analytics, one of the first to pull the alarm on AIG as soon as February 2008, the magnitude of the crisis has been widely encouraged "by the laxity of the accounting methods, the weakness of governance and faulty supervision."

Chain reaction

To save AIG, the Federal Reserve had no alternative but to buy the products insured by AIG, which then allowed him to cancel the credit default swap"protecting them. In March 2009, the situation erupts in the big day. American taxpayers are discovering that 105 billion of public funds have been returned to U.S. and foreign banks Goldman Sachs, Deutsche Bank or Société Générale has thus collected 12 billion each. They have been compensated high price, which irritates the operation critics who believe the Fed would have to negotiate to the best. For the Chairman of the Committee on financial services of the Senate, Democratic Senator Christopher Dodd, "AIG partners were not innocent victims... it were sophisticated investors who have taken huge and irresponsible risks." A "strictly confidential" report issued by AIG to members of Congress, the bankruptcy of the insurer would have resulted in "a chain reaction of considerable proportions (...)". "with a systemic risk primarily focused on the area of life insurance that represents 2.3 million jobs. It has perhaps avoided the worst. But the credibility of the global financial system took a serious blow. To economist Brad Setser of the Council of Foreign Affairs, in a certain way, "AIG has played the role of insurer of last resort for system financial American phantom operating offshore."