Lou Lucido actually lost AIG $35 billion. It’s in Bloomberg so it really must be true.Except that he didn’t at all. It’s a fake out. He did lose them $616 million though. Here’s how he did it.
- Lucido’s team bought a bunch of CDOs. For example, a $7 million of a mostly subprime bond.
- They put the CDOs in a $1.5 billion fund managed by TCW (like these guys Lewis shows us were total idiots in his new book) called Davis Square Funding.
- A few months later, TCW asked them to buy more and Lucido bought $3 million more.
- TCW all the while replaced around 1/3 of the bonds in Lucido’s team’s CDOs with newer, crappier bonds.
- Lucido keeps buying.
- He keeps buying, and TCW keeps keeps rolling over the bonds into garbage.
- The bonds eventually became worthless.
- In total, Lou Lucido’s CDOs lost $616 in value.
“We made informed decisions based on the underwriting criteria at the time and felt we were working toward our investors’ best interests,” Lucido told Bloomberg.
But basically, TCW had a fee structure that encouraged it to go more into crap, and AIG was asleep at the wheel.
By the way, the $1.5 billion Davis Square fund was created by Goldman Sachs (so they set the criteria for managing it, including one stipulation which allowed as much as half of Davis Square to be bonds backed by subprime mortgages, given to people with bad or limited credit histories) and registered in the Cayman Islands.
As for that $35 billion… well, that’s the sum total of lots of similarly ignorant moves.
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