Book Review: Fatal Risk – A Cautionary Tale of AIG’s Corporate Suicide

19 Jul

A while back I asked seasoned financial reporter/investigator Roddy Boyd if I could review his book, Fatal Risk, about the rise and epic fall of AIG.  I finally finished it last week and while I didn’t think I’d ever say this, AIG was a REALLY ridiculously interesting story and one I absolutely recommend reading to anyone and everyone even tangentially interested in business, finance, investing, and economics.  This is truly one of the most important lessons in history, and as they say, those who fail to learn from history are doomed to repeat it…




I don’t want to summarize or go into much detail here because when I say you really need to read it in full, I mean it, and then some; in order to understand how AIG got to the point where it became the biggest single-company bailout in U.S. history, you have to understand how AIG got to be so big in the first place.  In that respect, the story of AIG, as Roddy explains in much detail, is to a very large extent the story of Hank Greenberg who took it from a relatively small operation into a global organization with business in virtually every country in the world.  So great was Greenberg’s knowledge of and connections to leaders across the globe that the CIA and State Department called HIM for help!

Much of the first half of the book is dedicated to Hank and how he built AIG into one of the largest, most amazing businesses in history, something that in all likelihood, only a man as obsessive and constantly risk-averse as Greenberg could accomplish.  The second half of the book talks about the ill-fated project that would become AIG Financial Products and how it came to be.  You’ll learn things in this book about how it was constructed, managed, and kept in check that you never ever heard a peep of from the larger financial media.    With Greenberg as the CEO of AIG, FP was kept on a very, very tight leash and Greenberg was constantly in contact with FP management.  What began as a relatively small project to put AIG’s balance sheet to work and improve profit margins eventually grew into a several-hundred-million dollar a year contribution to AIG’s bottom line.

But it was not all smooth sailing for FP or Greenberg, and that is where the story of AIG and FP begins to get ugly.  Originally, FP had a strict NO MORTGAGES policy, but after the bulk of its founders had left and Greenberg found himself in trouble (eventually “asked” to resign), FP decided to get into mortgage related trades.  There is much jucier detail here that is definitely worth reading because it just blows away anything you’ve read in the financial media.  Contrary to the popular account, Joseph Cassano wasn’t just some arrogant schmuck who kept AIG writing CDS on MBS and CDOs of MBS (super senior tranches) after it became wildly apparent things might not work out as originally expected.  The stopped the program years before the financial crisis hit, but by then it was too late, and their models – developed by Yale School of Management Professor Gary Gorton, indicated it would take Great Depression-type problems for them to incur any material losses.  For all of the amazing brains at AIGFP, and for all of the money its employees had tied up in the firm (some $600 million or so), no one foresaw things would get as bad as they did, as fast as they did, and as widespread as they did.  AIGFP is hardly alone in this, and considering how much monetary incentive FP’s employees had on the line, it didn’t much help.

It turns out (as was corroborated by their testimony and the TARP Special Inspector General’s report), Goldman Sachs was NOT the villain that killed AIG; on the contrary as well.  They were one of it not the only firm that was actually trading these securities at the prices they quoted AIG on their swaps; the rest of the street was just offering marks “for informational purposes only.”  I doubt any of the Goldman haters will read the book and get the facts straight, but for those of you who care about things like the truth, this is an especially critical part of the history of the Financial Crisis and Goldman’s role in it.  I cannot stress enough how important Roddy’s account of what was going on on Wall Street and FP over the ~5-7 years leading up to the Crisis is.  I was there working on Wall Street, writing and reading about it and knew most of the media/popular accusations against Goldman and the rest of the street were largely exaggerated if not made up entirely, but Boyd does as good a job as anyone could to support it.

I don’t want to say any more because you really have to read the book, not just take my quick summary (and its not even that).  If you want to learn about the formerly most-connected financial services company in the world, how it came to be, how it signed its own death warrant with its Icarus-like ambitions, and how it almost brought down the entire global economy, you need to read this book.

If you don’t care about any of those things, you should, so read it anyway!



6 Responses to “Book Review: Fatal Risk – A Cautionary Tale of AIG’s Corporate Suicide”

  1. dinosaurtrader July 19, 2011 at 4:23 pm #

    Seems like all of these big company blowup stories have this element… “no one foresaw things would get as bad as they did, as fast as they did, and as widespread as they did.”

    I doubt this. My guess is that there was probably a culture problem. Someone saw the issues but didn’t have the balls or the authority to be able to bring it to the forefront.


    • The Analyst July 19, 2011 at 4:25 pm #

      Absolutely right. There were people in and outside the firm that warned, but they were (like almost always) ignored/etc.

  2. Brad July 19, 2011 at 5:25 pm #

    What I gathered from McLean & Nocera’s “All the Devils are Here”, was that the downfall of AIG can be traced to the CSAs (collateral calls) included in the CDS written by AIG-FP. Does this book cover the thought process behind their inclusion (the monolines offered no such features in their CDS), and does it give insight into the apparent blindspot in managing the liquidity risk that arose from the unique features of AIG-FP written CDS?

    • The Analyst July 19, 2011 at 5:29 pm #

      AIG’s GC claims to have no idea about the Credit Support Annexes, pretty sure it was the same story from the head of Risk. I’m not sure if even within FP even Trade Review picked up on the fact that the trades were marked by their counterparties and at whatever price their counterparties said.

      Devil is in the details, eh?


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    […] Stone Street: Book Review: Fatal Risk – A Cautionary Tale of AIG’s Corporate Suicide […]

  2. Wednesday links: no second chances | Abnormal Returns - July 20, 2011

    […] A rave review of Roddy Boyd’s Fatal Risk – A Cautionary Tale of AIG’s Corporate Suicide.  (Stone Street Advisors) […]

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