AIG Continued to Write Protection After 2005 [Lewis, TIME are Incorrect]
TSF – March 20, 2010
By Janet Tavakoli

JT Note: Independent to the topic below, Stephen Gandel wrote an incorrect story for TIME. He didn't obtain updates from the rating agencies, and he either didn't hear or didn't understand what I said, because what he wrote does not represent my position regarding AIG. It is inexcusable, since there are already articles and facts in the public domain about the poor performance of CDOs underwritten by Goldman and protected by AIG. Read my position in the "News" section of this site, and this Wall Street Journal article is also a good place to start.


Several people asked me this week whether AIG wrote credit default swap protection after 2005, since Michael Lewis wrote that AIG stopped writing protection at the end of 2005. Actually, AIG wrote protection after 2005 including protection on suspect residential mortgage products. In fact, AIG continued to write protection, even after I challenged its failure to take material write downs on its “super senior” CDSs in August 2007.

One had to do analysis to know this, until Congress released details of AIG’s of Schedule A filing. The general public would not have had access to the necessary information, since AIG’s schedule A was redacted. Matthew Goldstein filed a FOIA for the redacted Schedule A data. When that didn’t work and Congress finally released the information, he summarized AIG’s post-2005 activity (“AIG Filing Casts Doubt on ‘Limited Exposure’ Claim,” Reuters, February 24, 2010).

Some of AIG’s worst performing trades occurred after 2005. Notably, Mathew Goldstein points out in his article that Goldman Sachs was the biggest single purchaser of default protection from AIG on CDOs backed by residential mortgage backed securities after 2005. Goldman “purchased CDS on 10 securities with a face value of $6.54 billion.” Deutsche also bought protection on $7.4 billion of commercial real estate backed CDOs from AIG after 2005 (Max 2007-1 and Max 2008-1).

[N.B. $8.2 billion of Goldman synthetic CDOs, including Abacus deals originated after 2005, were not assumed by Maiden Lane III. The risk of these credit default swaps remain AIG’s—and taxpayers’—obligation.]

Less obvious is a secondary effect of managers at times trading very risky post-2005 CDOs into the CDO portfolios managed for AIG (“Congress Exposes Potential Profiteering in AIG’s Deals,” HuffPo Jan 28, 2010).

The above does not address AIG’s securities lending, other long-dated derivatives exposures, or its mortgage related investments for its insurance portfolios.

Janet Tavakoli's book on the global financial meltdown and how to fix it is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)


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