‘A Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide’ by Roddy Boyd

There are a few people that I follow on Twitter. I must admit that I became quite addicted to Twitter in the US so I deleted my account and now that I am in Australia, I read their entire day’s tweeting when I wake up.

So my list is the Matt Yglesias, the Reformed Broker, Paul Krugman, John Hempton, Roy Wood Jnr and sometimes Roddy Boyd. I would note that there are no women so that is a weakness in my daily news collection process.

Rod Boyd is an irregular source but I admire his ability to dissect company public filings and conduct primary research to root out frauds. His work on pharma company Valeant resulted in a 90% reduction in market value. I remember that his angle was that there were a number of ‘companies’ that Valeant had set up to be customers so that it could juice its revenue numbers. He worked out that the CEO was a mad chess player and that these shell companies were named after a move in chess. There was also a fair bit of pharmaceutical pricing fraud.

Rod also wrote a book about how the world’s largest insurance company was a major catalyst for the 2008 crisis and then exploded to be saved by the US Government. The book traces the lineage of the disaster through management and a range of groups within the company. I took two concepts away from the book.

Firstly, in the global capital markets, a Triple A credit rating is golden. The influence of the rating on transactions is that it effectively says ‘there is no risk in dealing with this client’. The absence of credit risk means that all participants are able to take on more risk in the rest of the transaction. Add revenue and earnings targets with accompanying bonuses to the mix and there is the potential (and even strong likelihood) that risk taking will quickly get out of control so any stuff up has much greater implications. The Triple A, if leveraged for substantial profit, can quickly become a much bigger source of risk for a company.

The second is the interconnections of the world. AIG insured across the globe because it diversified its risk. The issue was, once it got to a certain size, it linked risk across the globe. The 2008 financial crisis obliterated financial institutions across the globe and stalled global growth for five years. AIG is a big reason for this. The rapid development of interconnections is difficult to integrate into risk models but the AIG example shows that it is critical to think about risk in terms of linkages.

The book is not easy to read and spends a significant amount of time on the exotic insurance products used by AIG. But, at its core, the book highlights the ever growing risk of ignoring linkages and how risk taking is the product of incentives so even the ‘safest’ companies can end up being the riskiest.

Amazon