The AIG story

New books investigating the causes and consequences of the financial crisis continue to flow. Today's Financial Times has a review (reg. or £ required) of Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide by Roddy Boyd.

A comment in the broadly positive review that caught my eye was this:

incredible is the book’s suggestion that only perhaps four people at
AIG knew of the time bomb in FP’s derivatives that covered complex
mortgage bonds.”

It seems to me not at all surprising that nobody either knew or understood the nature and extent of the company's risks, or indeed really understood the business at all. Surely it is all too clear that in all the troubled banks, and in every corporate horror story of recent times, neither the executives nor, for sure, the non-executives, had a clue about the business for which they were formally responsible.

These governance failures have been too little discussed in the aftermath of the crisis. Ensuring an adequate flow of information to those with ultimate responsibility is the central challenge of governance, especially in large and complex organisations.  It is a mark of a well run organisation that much energy goes into addressing it and challenging executive assumptions.

However, the boards of banks were populated by chaps who knew each other on the boardroom circuit, thought each other worth paying 'in the top quartile' of pay and bonuses, and all too often understood nothing about derivatives or accountancy policy or risk assessment.

Nothing, but nothing, as far as I'm aware, has been done to tackle the demonstrably weak governance of the banking sector. Time for some radical thoughts about it. Supervisory boards to represent the taxpayer interest in the quasi-nationalised banks? New regulatory requirements on the qualifications of non-executives to be appointed? Annual parliamentary appearances by the main bank chairmen and chief executives? I don't know what the right structure is, but do know that we don't yet have it.


2 thoughts on “The AIG story

  1. John Hempton at his Bronte Capital blog has an enthusiatic review of “Fatal Risk”. He adds clear views of his opinions. Hempton's review and opinions are worth taking the time to read and think about .
    From his review: “The fact that the failure of these people was not criminal does not excuse it. These people were paid big multiples of average earnings and demonstrated that they can't do their job. So they are still paid big multiples of average earnings.”
    Here is a link .

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