I have been looking through a fair amount of material recently on governance issues. In the course of this, I came across this New York Times in depth article on the demise of AIG and why it was rescued.
Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.
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.
In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.
The article is interesting and has references to some other material and multi-media.
It points up the need for governance to be not just a process, but part of the values of an organisation . Further, questions should be asked about the qualities of leadership that allowed this to happen. What was present in the organisational culture that enabled this to occur?
The article referenced dates from late September, but the key lessons remain.