The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.
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My personal thoughts below
Insurance is not a conventional business, you don't immediate know the cost of the product you just sold. When you sell a a car, you already know how much you've spent on building it. But with insurance, you collect your revenue on a regular basis and the true cost (ie a catastrophe that causes you to pay out) can occur at any time, or not occur at all. The trick of the business is to figure out what % of all the policies you've written you will have to pay out. So how well a insurance company is doing can't be measured in 1 or 2 years, it takes at least 5 or 10 years.
Where AIG went wrong is insuring mortgage backed securities by issuing credit default swaps, which is a fairly new innovation. AIG's expertise is in auto, home, or life insurance, so they have no business playing with mortgage backed securities. They probably thought, "Hey! We can collect fatty premiums and the risk of those securities defaulting is very slim. What a deal!" It looked like a great idea for a few years, now it has blown up in their face. Nassim Taleb is putting this example of a black swan in his next book as we speak...
1 comment:
Taleb has a really good essay on edge.org about this...
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