Like everyone else, I have been following the financial crisis with morbid fascination, but was surprised when AIG got into difficulties and had to be bailed out by the US Treasury with a loan of $85bn. It was initially difficult to understand how such a huge hole could have opened up on their balance sheet.
This article in the IHT explains it - they were providing a sophisticated form of credit insurance through a financial products unit in London run by a chap called Joseph Cassano. Lloyd's used to have a ban on this type of insurance (though mortagee interest insurance has been commonly used in shipping for many years) as it's so risky - and because it usually involves selection against underwriters as well as accentuating moral hazard.
What worries me now is that no insurer hangs onto to 100% of a risk - they always pass a - usually large - proportion to their reinsurers. This risk may well now be hiding in some innocent-looking treaties waiting to blow up....
Stop Press: But they apparently didn't reinsure the risk - at least from 2005 onwards!
Stop Press: 28th Feb 2009 - the story is clearer now, but no less heinous. See the IHT
Stop Press: 25th March 2009 - More comment on Joseph Cassano from Ariana Huffington here
And further article, which looks rather more darkly at AIG istelf, is here
Sto Press: June 2009- Michael Lewis on Joseph Cassano in Vanity Fair 'The Man Who Crashed the World'
