Two executives at Banque AIG, the French banking subsidiary of AIG’s toxic Financial Products group, have resigned.
Remarkably, this could apparently result in a regulatory seizure by French financial authorities, which might set off a financial disaster by triggering cross-default provisions in AIG credit default swaps worth $234 billion. The European banks that used the CDS contracts to game required capital regulations would then be forced to raise new capital to make up for the shortfall.
How could two guys leaving their job imperil the European banking system? You can call it systemic risk if you like but this dependence on just a few individuals to keep things from going off the rails is far more extreme than any thing that usually goes under that name. It’s yet another reason that AIG is the worst company in the world.
The Wall Street Journal’s report doesn’t make it clear, but it seems likely that the resignations of these two guys–Mauro Gabriele and James Shephard–were brought about by the political reaction to AIG bonuses. When AIG first explained the bonuses in a memo, it specifically cited the danger that executives on the board of Banque AIG might resign if not paid. French authorities are then authorised to appoint replacements. This, in turn, would trigger the change of control provisions in AIG’s derivatives contracts.
Executives at AIG and officials from the Federal Reserve are working with French regulators to avoid this outcome. It seems likely that they will be able to convince the French to exercise forebearance. After all, this presents a greater problem for Europe than for the US. It’s their banks that will be have capital shortfalls if AIG defaults on the CDS.