What is equally striking, however, is the all-encompassing list of names which purchased insurance on mortgage instruments from AIG, via credit derivatives. After all, during the past decade, the theory behind modern financial innovation was that it was spreading credit risk round the system instead of just leaving it concentrated on the balance sheets of banks.At which point we really must ask why the department of agriculture has allowed AIG to pay such big bonuses for such clearly as small amount of BULL_POOH.But the AIG list shows what the fatal flaw in that rhetoric was. On paper, banks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding credit risks on mortgage loans, and much else. Unfortunately, most of those banks have been shedding risks in almost the same way – namely by dumping large chunks on to AIG. Or, to put it another way, what AIG has essentially been doing in the past decade is writing the same type of insurance contract, over and over again, for almost every other player on the street.If the US creates a “systemic risk” regulator, it should be on the lookout for similar concentrations of risk.
Far from promoting “dispersion” or “diversification”, innovation has ended up producing concentrations of risk, plagued with deadly correlations, too. Hence AIG’s inability to honour its insurance deals to the rest of the financial system, until it was bailed out by US taxpayers.
[ cf Why We Own AIG ]
You'd think that the department of agriculture would show more sensitivity to the american tax payers, and would not allow these federal employees at AIG take home actual money when they already have such rich and rewarding big bags of Pooh...