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The Financial Crisis
Come, let us build for ourselves a city, and a tower whose top will reach into heaven.... (Genesis 11:4)

The Washington Post, one of America's preeminent watchdogs, closed out 2008 by publishing a three-part series detailing the origins, growth and collapse of AIG Financial Products, the once-venerable insurance company's division which developed increasingly complex, risky and internationally entangled transactions. The lucidly written articles explain how an initially modest, innovative business built on using quantitative modeling to reduce risk ended in catastrophic ruin. The series also provided insights into the broader global financial crisis.

As the Post explained, "Many of the most compelling aspects of the economic cataclysm can be seen through the story of AIG and its Financial Products unit: the failure of credit-rating firms, the absence of meaningful federal regulation, the mistaken belief that private contracts did not pose systemic risk, the veneration of computer models and quantitative analysis."

Hubris, greed and an abandonment of basic principles all played major roles in AIG's collapse. A former senior AIG official discussing credit-default swaps stated, "The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money." The notion that markets could generate "free money" is the financial equivalent of believing in a perpetual motion machine.

The Post series also discussed regulatory and political failures. As the articles explained, when the head of the Commodity Futures Trading Commission "argued forcefully for a public debate about whether derivatives posed an unknown and growing risk to the world's financial system" she was opposed by "More powerful regulators, including Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt... They and others said...her call for action was casting a 'shadow of regulatory uncertainty over an otherwise thriving market.' Greenspan, in particular, argued a free-market view."

The Post series should be closely studied by regulators, political leaders, corporate officials and the Pulitzer committee.

See Washington Post articles

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