Comments on: The Man Who Crashed the World?

By: Min

Min — Thu, 16 Jul 2009 17:52:23 +0000

bayardwaterbury: “Although CDS’s were not catagorized as insurance products, they were only that (hedges against loss – which all insurance is ultimately).”

It thought that they were more than hedges, that they could function as bets, like taking out fire insurance on a stranger’s house, and that it was the casino aspect that contributed to the enormous spread of risk. No?

By: Min

Min — Thu, 16 Jul 2009 17:47:16 +0000

Uncle Billy: “Cassano came from Drexel. The guy who appointed him to his position, Savage, came from Drexel. Michael Milken came from Drexel.

“(Are we seeing a pattern here?)

“The Morgan Mafia gave them the gun and they used it.

“Someone was using their already proven, healthy capacity for greed. Wonder who that someone could be. And what’s the endgame?”

Yes, the importance of culture is important to understanding what happened. It is not just Wall Street vs. Main Street. Different corporate cultures are different. Ideas, attitudes, and practices migrate, compete, and change as people move between firms, and between industry and government.

By: Sid

Sid — Thu, 16 Jul 2009 08:21:52 +0000

This is similar to my take – Lewis seems to be trying to find a scapegoat, implying that “everything would have worked out fine if we hadn’t promoted that Cassano above his competence!”

Of course, the idea that one person could be responsible for a systemic failure is, as someone put it: fiction. (I think last year there were some attempts to nominate Kerviel as Official Crisis Scapegoat, but they didn’t quite stick.)

Like any other quest for a pat answer, Lewis’ article just raises questions.

Why were the rating agencies giving tranches of garbage a AAA rating?

Why were AIG management not paying attention to what FP was doing?

Why did they buyers not examine what they were buying?

Why did the AIG quants not examine what they were modelling and pricing?

Why were the quants so addicted to money that they continued to work for what was obviously a trainwreck, or accepted Cassano’s abuse? (It’s not like these people couldn’t get jobs elsewhere or were not rich enough to retire.)

If Cassano is so rich and unemployed, what on earth is he doing in London? Can’t he take his money and live a decent live somewhere civilized, like Romania?

By: Patrick

Patrick — Thu, 16 Jul 2009 07:31:22 +0000

I think maybe the point is that if AIG hadn’t gotten them hooked in 2004-2005 they might not have been so strung out on CDS in 2006-2007. But in the counterfactual it is always possible some other pusher might have relieved those CDS junkies of their money.

AIG didn’t make the banks stupid, it got them hooked, and by then they had been using so long that they no longer wanted to stop. That easy profit felt too good. Goldman is really the only one bank that went to rehab.

By: bayardwaterbury

bayardwaterbury — Thu, 16 Jul 2009 05:26:52 +0000

For me, from the beginning, regardless of who was responsible for CDS’s, AIG was the largest insurance company in the world, highly trusted. They could never have achieved what they did in insurance, if it were not for a deep understanding of following actuarilly established reserve requirements (capital held against potential losses). Insurers are not only prudent, but mostly forced to be that way be regulators. Although CDS’s were not catagorized as insurance products, they were only that (hedges against loss – which all insurance is ultimately). There were two problems, either the loss potential was essentially discounted to zero for the reason of an incredibly bad business decision, or they fraudulently failed to file with the insurance commissioners’ offices to have the product analysed and rated for loss potential and premium adjustment (no rate filing). Regardless of the cause, the failure was rooted in top-down mismanagement. There is simply no other possibility.

More and more these days, I have come to believe that if mismanagement is so severe that it results in major harm to many, it may be categorized as criminal negligence, whether intentional or not (regardless whether AIG’s managers failed to understand the loss poteniiality, or not. I know that Justice is heavily involved in prosecuting many involved in the collapse, but I would like to see part of the reform be the creation of criminal penalties for gross mismanagement.

By: Tom Erez

Tom Erez — Thu, 16 Jul 2009 04:09:39 +0000

Bravo for the careful reading, Min!

By: anne

anne — Thu, 16 Jul 2009 03:26:58 +0000

Well I guess with Michael Lewis, we have our modern day Tolkien, writing the tale of the one man who ruled them all…

The idea that all those Ivy MBAs who bought AIG CDSs were rooked somehow by one AIG guy – that Cassano had terrorized everyone at his firm into paralysis, allowing him to lead AIG and its merry band of followers down the road to ruin – that one man had the power and influence to crash the global economy is fiction of the first order.

By: Ted K

Ted K — Thu, 16 Jul 2009 01:24:50 +0000

I’m definitely not a Joseph Cassano fan, but as time has passed by I think Joseph Cassano has become too much of a convenient poster boy for PREVALENT problems throughout all of AIG’s leadership. And I guess AIG must love the way Michael Lewis seems to lay all the blame right there at Joe Cassano’s feet. If I were Cassano’s leaders I’d send Michael Lewis a “Thank You” note.

Interesting how they payed Cassano 1 million to sit and watch TV in the office. Do you think as AIG was showing Cassano the door out they may have been paying Cassano $1 million for OTHER reasons than to “consult”?? Lewis never seems to explore this question. Maybe Vanity Fair doesn’t pay enough for that?

It’s a great way for Lewis to tie a neat little bow around a very complex story. But I don’t think it shows the real problem at AIG. And I don’t think Lewis is doing his readers a service.

By: Manshu

Manshu — Thu, 16 Jul 2009 00:51:43 +0000

I stopped mid way because I thought I was missing something and thought I’d come back to the article. Now I don’t have to.

By: jng

jng — Wed, 15 Jul 2009 20:38:28 +0000

Actually Lewis’ account is not particularly new. Look at Gillian Tett’s book, Fool’s Gold. She tells the story from the perspective of the J.P.Morgan bankers who created the form of these derivatives. They were suspicious about mortgage-backed CDOs because of insufficient data about default and correlation risks, and in particular couldn’t understand how any bank could possibly load up its balance sheet with “supersenior” tranches of these securities once AIG stopped writing CDSs on them, ie, post 2005. It’s why JPM came through the crisis well.

By: Goethe

Goethe — Wed, 15 Jul 2009 19:52:22 +0000

True enough, but why continue to pay people who crushed and crashed all else? If the banks suddenly grew balls and agreed to take more risk, perhaps it was with some foreknowledge they had a scapegoat in hand and they themselves would be bailed out, and bonuses would continue to flow to the right people.

By: Uncle Billy, Mental Widget

Uncle Billy, Mental Widget — Wed, 15 Jul 2009 19:42:22 +0000

Cassano came from Drexel. The guy who appointed him to his position, Savage, came from Drexel. Michael Milken came from Drexel.

(Are we seeing a pattern here?)

The Morgan Mafia gave them the gun and they used it.

Someone was using their already proven, healthy capacity for greed. Wonder who that someone could be. And what’s the endgame?

Did it go like this?

Lord Professor Droolington (LPD): Let’s have a little fun with those yanks across the pond, shall we?

Snivvles: What do you have in mind, midrool?

LPD: Find some bright young mathematicians over at the Fabian club and tell them they’re going on a long mission in the service of her majesty the queen.

Snivvles: Yes midrool. And what shall I tell them they will be doing?

LPD: Their task is to give the americans the tools they need to destroy themselves over a good twenty years. Shant be too difficult, and we’ll end up making a bloody fortune. First, they need to inflate a gargantuan credit bubble, then prick it, then deflate it until unemployment reaches, say, 40%. At that point they will need assistance in nationalizing everything. We shall be glad to oblige. Finally they will need some help in privatizing everything again, and we will once again stand by our american cousins.

By: JZumbrun

JZumbrun — Wed, 15 Jul 2009 19:23:23 +0000

I think Lewis makes the argument (that others have made — I think the WashPost detailed this in its December profile of AIG FP) that there was indeed a “structural reason AIG was the only company that could have created the mess it did”, namely that AIG had that perfect AAA credit rating? Okay, it’s not quite the only AAA company that could have launched something of this scale, but it does reduce the number of potential firms that could have done this to 2.5: AIG, Berkshire, maybe GE. But it’s not as if Microsoft or Exxon or J&J were ever going to do it.

By: Art

Art — Wed, 15 Jul 2009 19:13:02 +0000

Traders were scared of Joe Cassano, because although he eagerly cut them checks for millions, he also made them say out loud that their bottled water was his bottled water. Wha?

There is no secret to what happened at AIG that we can learn from. I was pleased to see at least that somebody did recognize just how risky the business was, even if it was way too late.

By: Ben M

Ben M — Wed, 15 Jul 2009 18:56:41 +0000

What I take from Lewis’s account is that people were blinded by money. When faced with the prospect of making less, or looking bad, the situation got out of hand at both FP and their customers.

I agree with Min that Lewis’s account isn’t predictive of the next crisis, but like his other work, should be taken as seriously as Lewis himself takes the rest of the world, which is with a grain of salt.