AIG Gets More Disturbing

I’ve written a few times about AIG’s attempt to buy back the Maiden Lane II portfolio that the Fed took off their hands during the crisis.  First, AIG submitted a bid to buyback these higher yielding investments, but this week that bid was rejected by the NY Fed.  I thought AIG’s bid was troubling, and the Fed’s rejection was refreshingly sane, but AIG CEO Robert Benmosche’s response has me back deep into the “troubled” state again:

“It’s a huge problem for us,” he told DealBook in a telephone interview.”

What exactly is a huge problem?  That they couldn’t get an exclusive look to buy a portfolio of high yielding (and never forget, readers, higher yielding means higher risk!) assets at non-market prices?  That’s called REALITY – it shouldn’t be disturbing.

Among the main issues is that A.I.G had built buying the securities into its recapitalization plan, a broad array of moves aimed at paying back the government, he said. The insurer had been stockpiling cash in anticipation of securing a deal with the New York Fed by no later than January. Not striking an agreement on the securities repurchase means that A.I.G. will lose out on months of anticipated interest income from the portfolio.

This annoys me greatly.  AIG had basically already counted the income from this portfolio – the same portfolio that played a role in blowing up their company two years ago – as money good.  Reward without risk.  WTF?!?!?  Have we learned nothing?

He said that the New York Fed’s decision could have been based at least in part on potential criticism that selling the securities outright to A.I.G. could have provoked criticism of a sweetheart deal.

Yes, absolutely, and that makes perfect sense…

Mr. Benmosche said that he had not yet decided whether to buy at least some of the securities. He noted that while the insurer had done analysis on the portfolio as a whole, the company would need to carefully scrutinize each individual parcel the New York Fed decided to sell.

Oy vey.  Remember what another huge problem in the financial crisis was?  Analysts used portfolio level correlation models to draw conclusions like “it would be impossible for all of these assets to lose money at the same time.”  Of course, the correlations were wrong.  A good starting point for ANY portfolio manager would be to know the risks of the individual assets in the portfolio – and yet Benmosche is stating that AIG hasn’t done that analysis!

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