While everyone agrees that AIG wasn’t really a AAA credit risk once its “savings and loan” operation in London had guaranteed half the CDO world for a pittance, some do not know why it was a AAA in the first place.
Such was the case with a nice couple I met at a sad/happy event last night.
The event was a memorial for a college friend who died far too soon.
I sat with a couple from Albert Capsouto’s neighborhood, one of Manhattan’s most unusual. In spite of decades of being nearly empty at night, TriBeCa has a strong sense of community.
Albert will be remembered with a scholarship fund at his old high school (Stuyvesant) and, presuming the City Council agrees with the Neighborhood Board, the renaming of a small urban park.
For those who know the area and the fine bistro Albert and his brothers opened nearly 30 years ago, Jaques and Sami will carry on as before, and Albert’s nephew will greet guests as Albert did for so many years.
My table-mates and I talked about this and that, and my years on the Street came up. When the topic of AIG came up, my new friends asked an obvious question:
Why did AIG have a AAA rating in the first place?
A: Because a huge part of their business consisted of lending people their own money, and taking a spread out of the middle.
Seems crazy, doesn’t it? Who would give their money to a financial institution for safekeeping and a small return, and then turn around and borrow money from that same institution at a higher interest rate?
Millions of people (or hundreds of thousands) did exactly that. What matters is that they did it with billions and billions of dollars.
[For those who checked the link, my apologies for the small joke. I loved that series when it first came out, almost as much as I loved Feynman’s three volumes. It does serve to show us how we adopt something as true, when it isn’t, since Sagan never actually said “billions and billions.”]
If you were in Singapore, or any of a number of places where emigrating and taking your money with you was difficult, life insurance was a vehicle you could use to turn even large fortunes portable. There were even tax benefits of letting an insurance company manage your money.
So let’s say you had made a fortune in a country that didn’t want you to take large sums of money out of their economy. Let’s say that you wanted to move to Vancouver, BC.
If you bought a very large cash value life insurance policy from AIG Singapore, you had not moved your money. The type of policy even has a name — a “wrapper.”
If y0u did move, and in your new home approached AIG Canada, they could certainly lend you money secured by your Singaporean life insurance policy. Voila! You could start over with almost all of your millions intact, and only pay a few percentage points per year to have access to that money in your new home.
Some people even used these methods to avoid paying taxes, which is why Switzerland is now looking into the burgeoning wrapper business that European insurance companies are writing, filling the void left by one of the most successful AAA companies ever, at least until they hired a fast-talking crew of Drexelites who were convinced they had discovered free money writing CDS.