Behind AIG’s Fall, Blind Eye to a Web of Risk

By The Editors

A fascinating peek at how a small unit that "flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models" brought down AIG, the world's largest insurance company. "Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them. Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy."

Posted 9/29/08 at 4:27 AM