Monday, March 2, 2009

In Plain Sight

Joe Nocera at the NY Times had this piece on 2/27 that really gives a rather elegant explanation of the mess created by insurers like AIG. The entire piece is well worth a read but this gem (among many gems) really stuck out:

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

But this is probably the most galling bit:

It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.

And now the American taxpayer is stuck with a bill created by people who knew better and ignored the obvious risks they were taking. They misused a bond ratings system that allowed them to create a devastating blow to our economy and the regulators watched it happen.

Nocera also points out that part of the justification for bailing out AIG is to protect the worldwide financial. The obvious question becomes then, where is the support for AIG from foreign governments? Shouldn't they be pitching in to bailout the worldwide financial system? Why is it being left to only the American taxpayers?

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