Monday, December 29, 2008

risk and aig

Today the Washington Post ran part one of a three-parter on "The Crash: What Went Wrong." Today's installment was an interesting bit on the founding and early operations of the Financial Products people and their "beautiful machine" at insurance giant AIG - AIG of $150 billion bailout fame.

One passage in particular caught my eye:

One detail in particular nagged at (AIG CEO Hank) Greenberg. Under the joint-venture agreement, Financial Products received its profits upfront, even if the transactions took 30 years to play out. AIG would be on the hook if something went wrong down the road, not Sosin and his team, who took their pay immediately.

Later on, Greenberg changed that to defer some of their pay, based on the length of the transaction. He recognized the risk of encouraging short-term action - after all, who will still be there at the end of a 30-year transaction?

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