Tuesday, March 17, 2009
A lesson for AIG
A $79 camera and a $60 helium balloon, allowed these four teenage students to take these pictures while 20 miles above the Earth!
'We also have learned that in practice things are not so simple and in the field problems appear that a textbook can't help you with."
So why didn't AIG models work?
They had the "dark side of the moon" structured products, that the customers understood that they didn't!
Thus AIG, became the supplier of "smoke and mirrors" to banks and institutions who were not earning their money by traditional banking models or needed a cover for their losses. AIG's payment of bonuses was just another "hush money payment" for those on the other side who knew the parties who bought equity with swaps for their failed profitability models.
It was just a salad bar of window dressing for firms that needed their losses covered up.
AIG was just the macrocosm of the Madoff microcosm but the government couldn't pierce enough hallways to get down into the main room where the fraud was perpetuated, nor did they understand it, so they backed up their contracts, and bailed out the banks, on the premise that the insurance policy holders would of taken these losses! All in the name of "systemic!"
AIG thought they were Google Earth, while the buyers of products from AIG were like the above kids. They knew what the real story was, and they didn't need AIG's algorithms to tell them otherwise!
Why else do the bonuses accrue to those that sold that which caused the losses? Shouldn't the bonuses accrue to those that conned AIG into selling these swaps?
Or is their a different reason for bonus? Andrew Ross Sorkin of the NY Times surmises:
A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.
Now they are going to "rat out" the Godfather? Is there any depth that these storytellers won't sink to?
In the above "Dark side of the moon" thesis we have this rather awkward conclusion:
Most popular structured products, however, do not follow this rational guideline, but instead use behavioral factors, like loss-aversion or probability mis-estimation to be attractive in the eyes of potential investors. In particular we could show that the currently most popular products clearly cannot be explained even within the framework of prospect theory, but only when taking into account probability mis-estimation. Thus we come to the conclusion that by and large the market for structured products, which is a huge business for banks, offers a utility gain for investors which is most likely only an illusion.
The dark side of the moon, is the far side. But the problems at AIG?
They emanated from the inside!
When will that story come out?
Start with London!
Posted by Palmoni at 7:35 AM