was posted several days ago: http://news.ycombinator.com/item?id=686344 http://news.ycombinator.com/item?id=686344 for what it's worth - my summary: -AIG FP w

was posted several days ago: http://news.ycombinator.com/item?id=686344 http://news.ycombinator.com/item?id=686344 for what it's worth - my summary: -AIG FP was created in 1987 when Howard Sosin, former Drexel Burnham, created a model on how to value and trade interest-rate swaps -The company to make money insuring these transactions could not be a bank (which would be bound by law to hoard unreasonable amounts of collateral), but needed AAA status: thus... an insurance company -AIG stops sub-prime mortgage insurance business in 2005 after realizing that 95% of their mortgage-related portfolio is sub-prime -Other firms instead jump into the lucrative market after 2004/2005... Wall Street underwrites 1.6 trillion $ in sub-prime and 1.2 trillion in Alt-A mortgages from 2004-2007 -AIG is bound by contract to provide collateral in case they lose AAA rating; as such legacy business (built up until 2005) traps them into bleeding collateral in the 2008 crash on their sub-prime credit default swap business -In result AIG runs out of capital reserves to provide collateral -By comparison, no money is lost on their corporate credit default swap business