Size matters

摘要

Even by the recent standards of Wall Street bailouts, that of American International Group is colossal. At its peak the insurance firm was the world's largest with a market value of $239 billion. Its assets are bigger than those of either Lehman Brothers or Fannie Mae. Yet size alone does not explain the rescue. Nor do the images of customers queuing to cancel their policies as far away as Singapore. AIG posed a systemic risk because of its investment bank, tucked away behind the dull business of writing insurance contracts, which has lost it both a fortune-and now its independence (see chart).rnAt one stage, this unit contributed over a quarter of profits. It has played the role of schmuck in one of finance's most dangerous games by writing credit-default swaps (CDSS), a type of guarantee against default, with a giant notional exposure of $441 billion as of June. Of this, $58 billion is exposed to subprime securities which have already generated huge mark-to-market losses. For regulators, the real horror story may be the $307 billion of contracts written on instruments owned by banks in America and Europe and designed to guarantee the banks' asset quality, thereby helping their regulatory capital levels.