28 October 2011

All the Devils: Two Points

I have written before in this blog about the McLean/Nocera book, ALL THE DEVILS ARE HERE.

It is a fine book, and I continue to re-read bits of it and discover new points.

Two quick ones today.

1) In their chapter 13, "The Wrap," the authors discuss AIG-FP, the financial products division of the vast insurance company AIG, and its contribution to the crisis. They introduce us to a fellow named Al Frost, who marketed credit default swaps (CDS) for AIG-FP.

After making this introduction, they mention that various CDS' held by AIG-FP included collateral triggers, i.e. contract clauses that allowed "counterparties to demand that AIG put up ... cold, hard cash -- if certain events took place."

Then there is this masterpiece of concision, in which Frost is allowed to hang himself.

"It is hard to know for sure if these triggers were there from the start. Frost ran his department like a little fiefdom; he tended to impart information on a need-to-know basis. (Through his attorney, Frost denies that he didn't talk freely about what was going on in his business.)"

Am I the only one who has chuckled at that?

2)  Also in chapter 13, the authors briefly mention Gary Gorton, a Yale economist hired by AIG-FP to develop their risk models.  His models obligingly told the division what everyone there wanted to hear, that the triggers weren't at all risky.

Gorton is mentioned again, much later, in chapter 16, about Treasury Secretary Hank Paulson.  "Yale economist Gary Gorton -- the game man who did risk modeling for AIG-FP -- explains the repo market this way...."

That wasn't a typo.  Or at least it wasn't my typo. They don't write that this is the "same man" mentioned earlier.  He is the "game man."   I imagine him telling his AIG-FP acquaintances: "Yes, I'll create a model that suits your desired conclusions.  I'm game!"

I suspect this isn't their typo either, that it is a deliberate play on the two words.  But hey, what do I know?  I'm just the game man who keeps reading their book.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.