How did an insurance company become so entangled in the sophisticated end of Wall Street and wind up the fool at the poker table?and answers that it was all because of one supposedly insecure tyrannical boss. I think that boss is simply being made a scapegoat for a more likely tale which does come through amidst the one-villain article.
The big Wall Street firms needed someone to insure their large bets and that someone couldn't be a bank:
The traits required of this corporation were that it not be a bank—and thus subject to bank regulation and the need to reserve capital against the risky assets—and that it be willing and able to bury exotic risks on its balance sheet. There was no real reason that company had to be A.I.G.; it could have been any AAA-rated entity with a huge balance sheet. Berkshire Hathaway, for instance, or General Electric. A.I.G. just got there first. In a financial system that was rapidly generating complicated risks, A.I.G. F.P. became a huge swallower of those risks.Over time, Wall Street firms started seeding these pools with 80% sub-prime loans and the folks running AIG's financial portfolio were too unsophisticated to cotton onto this. They didn't realize that they were being taken for a ride until a candidate hire did due diligence before accepting the job and told them what was happening:
The A.I.G. F.P. executives present were shocked by how little actual thought or analysis seemed to underpin the subprime-mortgage machine: it was simply a bet that U.S. home prices would never fall. Once he understood this, Joe Cassano actually changed his mind. He agreed with Gene Park: A.I.G. F.P. shouldn’t insure any more of these deals. And at the time it didn’t really seem like all that big of an issue. A.I.G. F.P. was generating around $2 billion year in profits. At the peak, the entire credit-default-swap business contributed only $180 million of that.So, AIG got out of the business. The Wall Street banks started to take the risk on new mortgage-based securities. But the insurance policies they'd already issued were still enforceable. And Goldman Sachs still held a whip:
[AIG's management] had agreed to several triggers, including A.I.G.’s losing its AAA credit rating, that would require the firm to post collateral. If the value of the underlying bonds fell, it would fork over cash, so that, for instance, Goldman Sachs would not need to be exposed for more than a day to A.I.G. Worse still, Goldman Sachs assigned the price to the underlying bonds—and thus could effectively demand as much collateral as it wanted.And that is exactly what they did when AIG lost its AAA rating because of the bad loans on its books. Michael Lewis seems to think that this makes AIG the fool at the poker table. And AIG's Joe Cassano the insecure villain of the piece.
Nope. This makes the US taxpayer the fool at the poker table.