AIG's Catastrophic Miscalculation

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Over the weekend I went through the December analyst meeting Webcast from AIG(AIG Quote). The whole presentation, the teach-in day, was devoted to one issue: how AIG was a capital-rich insurer with potential losses that, worst case, could never amount to a billion dollars. Repeatedly the company indentified the worst case, repeatedly saying it was so minuscule that you could only think that this company had it totally under control.

The presentation was amazing in its exactitude. You saw that the company owned only very small percentages of super-senior securities that would take defaults pretty much equal to those of the Depression to even begin to impact AIG's capital. The precision of the calculations made you doubt that this company had any real exposure to the problems facing so many banks.

In reality, it had among the worst exposure of any of them. The whole analyst day analysis was so deeply flawed that it is almost impossible to pull it apart to see what went wrong. ...