So it turns out that AIG’s Financial Products group wasn’t the only part of the company that engaged in reckless risktaking. This morning we learned that the company made some horrible mistakes at its securities lending business — basically looking to squeeze some extra margin by investing in subprime mortgages, as opposed to treasuries. When its clients came calling to redeem their deposits, AIG was totally screwed.
The point is that risk taking, leverage and a general abuse of its AAA rating were par for the course at AIG. The culture infected the whole company, or at least more than one narrow area.
And yet every time we defend credit default swaps, and suggest that they’re not as evil as people thin, someone invariably responds: What about AIG!?!?! It’s as though screaming out “AIG” is the equivalent of bringing out the nuclear bomb in a game of rock, paper, scissors. Like it’s the point to end all points.
And yet it’s obvious that writing CDS was just one part of the AIG story. When you hear stories like this morning’s, it’s easy to see how they could’ve gone bust no matter what. The problem is not credit default swaps, the problem is risk management and leverage. And you don’t need a new financial instrument to take some boneheaded, company-destroying moves.