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69 of 72 people found the following review helpful
4.0 out of 5 stars Essential reading for anyone who wants the whole story of AIG's downfall
If you followed the 2007-2009 subprime crisis you may think that you know most of the story of AIG's collapse. However, as is frequently the case, there is a lot more to the story than the simplified media narrative. "Fatal Risk" is a well-researched and highly readable account of the whole story behind the AIG disaster. The author Roddy Boyd clearly had excellent sources...
Published on March 28, 2011 by PAUL BRADSHAW

8 of 8 people found the following review helpful
2.0 out of 5 stars Literally difficult to read
So I will start this review by stating that this is the first review I've ever written for Amazon (despite purchasing MANY books from this site), I'm familiar with some investment terminology, and I know (either professionally or through a friend-of-a-friend) some of the people in this book. Therefore, I was extremely curious to read a reporter's theoretically unbiased...
Published on October 26, 2011 by avidreader

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69 of 72 people found the following review helpful
4.0 out of 5 stars Essential reading for anyone who wants the whole story of AIG's downfall, March 28, 2011
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If you followed the 2007-2009 subprime crisis you may think that you know most of the story of AIG's collapse. However, as is frequently the case, there is a lot more to the story than the simplified media narrative. "Fatal Risk" is a well-researched and highly readable account of the whole story behind the AIG disaster. The author Roddy Boyd clearly had excellent sources and there is a great deal of information here that you will not find anywhere else. The subprime mortgage affair was such a huge, global crisis (as Roddy Boyd puts it in this book, it was as though "the entire Western world was one big, highly leveraged real estate trade") that books covering the crisis as a whole (such as Michael Lewis's excellent "The Big Short") simply do not have the space for the detailed account of AIG that is "Fatal Risk".

Of course, any book about AIG has to tell the story of the remarkable Maurice "Hank" Greenberg, who was CEO of AIG from 1968 through 2005. Starting with a "far-flung and not terribly profitable" business, Greenberg built AIG into the largest and most respected insurance company in the world. We learn the story of how Greenberg served in World War 2 (landing on Omaha Beach on D-Day and participating in the liberation of the Dachau concentration camp) and in the Korean War, and how three days after his discharge he talked his way into an entry-level insurance job in New York, rose quickly through the ranks, and ended up at AIG a few years later. The book also tells the story of how the capital markets subsidiary AIG Financial Products (AIG-FP) was established in 1987, as a joint venture with the "absurdly intelligent" Howard Sosin, formerly of Drexel. While AIG-FP under Sosin was hugely successful, Greenberg forced Sosin out in 1993 because he was uncomfortable with the risks of some of AIG-FP's transactions. This is the first piece of a great deal of persuasive evidence from Boyd that AIG-FP's CDO losses in 2007-2008 would not have happened if Greenberg had still been the CEO of AIG.

So why was Greenberg not still the CEO in 2007? Boyd explains how this is largely because of the cynical and disgusting behavior of Eliot Spitzer, who at the time was the New York State Attorney General. Spitzer wanted to be elected Governor and his strategy was to prosecute the rich and the powerful, which he believed would be highly popular in the wake of the Enron scandal. Boyd explains how Spitzer's pretext was some questionable AIG transactions in 2000 and 2001. No matter that nobody was ever able to prove that Greenberg had any knowledge of these transactions (which amounted to a minuscule fraction of AIG's earnings), Spitzer was determined to remove Greenberg and threatened AIG with a corporate indictment if they did not fire him. Unfortunately, the AIG board was craven enough to cave in to Spitzer's demand. Spitzer's later conduct caused "utter disbelief" for Greenberg and his legal team. In a "freeform riff" on TV with George Stephanopoulos, Spitzer pronounced Greenberg guilty of fraud; as Boyd puts it, "the most powerful Attorney General in America was simply cutting out the annoying and tedious business of mustering evidence and filing suit, and pronounced Greenberg guilty". Every Spitzer episode leaves a nasty taste in your mouth, from the time Spitzer planned to have Greenberg arrested, to the threat to expand his investigation to the Starr (charitable) Foundation, based upon a summer intern in Spitzer's office misunderstanding some documents. (All of the criminal charges against Greenberg were dropped, and Spitzer has a "stunning record of losses and reversals" in his other high-profile prosecutions).

Spitzer is by far the least sympathetic character in this whole sorry saga. The dogged pursuit of Greenberg by this ambitious politician (who it later transpired was simultaneously prosecuting and patronizing prostitution rings) resulted in Greenberg being replaced by the affable but incompetent Martin Sullivan. Moreover, Spitzer forced AIG to abandon their plan for Greenberg to work with Sullivan during a transition period. So the highly risk-averse Greenberg was abruptly gone; the man who insisted on "detailed contingency plans for AIG's survival in the event of a nuclear attack on New York", and who personally grilled AIG-FP's Tokyo trader about the $10 million loss resulting from the collapse of Barings Bank (due to the unauthorized trading of Nick Leeson) was gone, replaced by Sullivan who apparently had no interest whatsoever in risk management.

Meanwhile at FP, Sosin was succeeded by the avuncular and widely respected Tom Savage, who had a well-known aversion to mortgage-related transactions, due to their "unanalyzable credit and unquantifiable risk". Savage had a much better relationship with Greenberg than Sosin had, and made sure to keep him very well informed of the details and risks of all of the transactions at FP. Given Greenberg's gimlet-eyed approach to risk management, and Savage's discomfort with mortgage risk, it is inconceivable that FP would have transacted the swaps that proved to be fatal if either man had remained in place. However, Greenberg was gone because of Spitzer's political ambition, and in 2001 Savage and his family wanted to move to a warmer climate and Savage was succeeded by Joe Cassano, who was much more comfortable taking mortgage risk than Savage had been. Boyd explains how FP's mortgage swap business ballooned under the Sullivan-Cassano regime; they "plugged a handful of variables into a 7-year old computer model; somehow the model always said 'yes' ". In 2005 a couple of AIG-FP traders were prescient enough to realize the growing risks of the subprime mortgage market, and because of this AIG-FP stopped executing these transactions in 2006. (Given that AIG-FP was aware of, and uncomfortable with, the subprime mortgage risk, it is inexplicable that while they stopped doing new transactions, they did not attempt to unwind or hedge the transactions that they had already closed). While AIG was kept informed of these transactions, it is incredible that there was "not a single instance of a New York-based senior manager sending so much as an inquisitive email about a swaps portfolio that amounted to 75 percent of AIG's equity base". It is very safe to say that this would not have been the case had Greenberg still been the CEO.

While most readers will already be familiar with the story of AIG-FP and its subprime swap portfolio, Boyd also describes another shocking reason for AIG's collapse that has received much less publicity. This is the story of the AIG Global Securities Lending program, which was run by AIG's Chief Investment Officer, Win Neuger. Neuger was responsible for investing the policyholder cash coming in from AIG's life insurance subsidiaries. When Greenberg was CEO he ensured that the fund was essentially riskless (Boyd describes one incident of Greenberg being absolutely livid when the fund made a small loss). However, as soon as Greenberg was gone Neuger pounced, quickly removing language from the prospectus that referred to "safety of funds" and "limitations on investment in derivatives", and loading up on subprime mortgage securities in a quest for what he referred to as "Ten Cubed", which was the goal of raising his unit's annual income to $1 billion. When the value of these assets crashed, there was no immediate problem because any redemptions could be funded by new cash that was coming into the program. This may remind you of Bernie Madoff, and for good reason; Boyd points out that Neuger was effectively running a giant Ponzi scheme. Instead of being disgraced and going to prison for life, however, Neuger's "corporate star remained ascendant and he earned $8.78 million for his work". And this all took place in AIG's New York offices under the not-so-watchful eyes of Martin Sullivan and his risk management executives. It is utterly inconceivable that anything like this would have happened under Greenberg.

"Fatal Risk" is a riveting read for anyone who wants to know the story of AIG and AIG Financial Products, the disgusting and undeserved hounding of Hank Greenberg by Eliot Spitzer, and the establishment and horrible consequences of Joe Cassano's swap book and Win Neuger's Ponzi scheme. On the negative side, I hate to nitpick but the book has a somewhat slapdash feel to it due to several spelling and grammatical errors ("This was even aggressive even for Hank", "AIG had just true constituent at that moment", and even the dreaded "seperate"). There are also some small factual errors; it's "Kelley Kirklin", not "Kelly Kirkland", and "Robert Hirst", not "Michael Hurst"; the aquarium in AIG-FP's Westport office was installed for Howard Sosin; and 10 basis points on $1 million is $1000, not $100,000. I noticed only one major error, and that is in the epilogue which states that AIG is "sporting, as of this writing [in January 2011], a stock price north of $54". While strictly speaking this is true, a very important caveat is omitted. Earlier in the book Boyd mentions that the September 2002 stock price was in the low $50s which may lead the reader to believe that in 2011 AIG's stock had risen back to its September 2002 level. However, in 2009 there was a 1-for-20 reverse stock split which means that the January 2011 stock price was effectively 95% below its September 2002 level. AIG has recovered to some degree but not to the extent that Boyd implies.
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21 of 23 people found the following review helpful
5.0 out of 5 stars Another Book Review from The Aleph Blog, April 4, 2011
David Merkel "Aleph Blog" (Ellicott City, MD United States) - See all my reviews
Note: in addition to this review, there is a special Q&A with Roddy Boyd over at my blog.

See: [...]


When I came to work at Provident Mutual, I gained a friend who reported to me. Roy was a real character. He had his rules for life, and they all made sense to some degree. When he opined on why we did business the way we did in the pension division, he would say,"We're the good guys. We are out to save the world for 0.25% on assets plus postage and handling."

I like working with the good guys; that is my style, if I can achieve it. Too many are purely out for personal enrichment, leaving aside the harm/good they do to others.

Roddy Boyd is one of the good guys. If you haven't read his stuff before in the papers/magazines in which he has written, you will benefit from his book on AIG.

This book has some real insight to it. It focuses on the years where AIG stopped being a mere insurer, and started being a player in the capital markets.

That said, it contains new data on M. R. Greenberg, especially regarding his war years. I found it very insightful, and helped me understand why he was the boss that he was. (I worked at AIG 1989-1992.) He was one tough man in both war and business.

Boyd interviewed as many as would talk with him, and excluded material that would not be confirmed by two parties. I felt that was an ethical way to deal with information not yet publicly known.

The driving force behind AIG's push into financial services was a need for income uncorrelated with the P&C insurance cycle. That also led to derivatives, commodities trading, airplane leasing, and expansion of the domestic life business, by purchasing SunAmerica and American General (both mistakes via overpayment in my opinion, and I know this business).

This expansion took a toll on AIG and as it could not grow profitably organically anymore at a 15% rate, it began to borrow money, both explicitly and implicitly, so as to lever a falling ROA (return on assets) into a 15% ROE (return on equity).

Greenberg oversaw the expansion into financial services, though not the imprudent risk taking after he was kicked out. He also managed the increase in debt and implicit debt -- most of that occurred under his watch. But those that followed him were nowhere near his equals. They could not manage that which was unmanagable by lesser mortals. Martin Sullivan should have broken up the company on day one; that was his failure. No one but Greenberg could manage the monstrosity. If he had remained there, I suspect the company would have blown up in 2010-2015, with him screaming all the way down. I think it was a mercy to him that he got kicked out.

When everything blew apart, no one could grasp the whole picture. Greenberg was gone. AIG was undermanaged. No one knew the whole story, and all of the correlations hinging on subprime lending: direct lending through the consumer finance arm, investments in the insurance companies, guarantees through the mortgage insurance subsidiaries , securities lending collateralized by subprime in the domestic life companies, and guarantees at AIG Financial Products.

The effort at diversification ended up being an exercise in concentration. Nothing grows to the sky. Big firms tend to rot from within and that was the case for AIG, Greenberg or no. I think Greenberg got sucked into the Wall Street earnings game, and it eventually got too big for him. It was certainly too big for his successors.

This was a great book. I loved every minute of reading it. I could not put it down. Roddy is one of the "good guys" and fights for what is right. But he is fair; he does not take someone to task unless he has incontrovertible evidence. Thus those who are suspected, but have no ironclad case against them walk, which is as it should be.

One more note, this book had a really good balance in how it would leave the main story to explain a concept, and the broader financial world. It left the main focus on AIG, while explaining how it fit into the broader picture.


At the time I wrote this review at my blog, the book was not available yet. I read an advance version, and there were some small errors that I expect will be eradicated when it goes to print.

Who would benefit from this book:

Anyone who wants to know more about AIG wold benefit. This is the best AIG crisis book yet. Beyond that, readers wanting to understand the complexity of the financial system, and how it led up to the crisis will benefit, as AIG was a microcosm of the greater panic.
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8 of 8 people found the following review helpful
2.0 out of 5 stars Literally difficult to read, October 26, 2011
So I will start this review by stating that this is the first review I've ever written for Amazon (despite purchasing MANY books from this site), I'm familiar with some investment terminology, and I know (either professionally or through a friend-of-a-friend) some of the people in this book. Therefore, I was extremely curious to read a reporter's theoretically unbiased take.

I decided to write this review because
1) the book was HARD to read. Not just because of the investment terminology, which can be truely difficult to understand, but it was something to do with sentence structure, chronology or other. More than once I had to re-read whole pages to figure out what happened or what Boyd was talking about.

2) the story is not unbiased at all. You can tell who gave Boyd interviews by how he describes their "faults". And he has stories about the most random, unimportant people in a department, clearly showing that John/Jane Doe gave the interview because otherwise they would NOT factor into this story. And by the way, some of the random people (with Boyd's help) inflated their roles in this overall story.

Overall, I hoped for a good, unbiased read from a reporter chronicling the AIG story, and that's not what I got. I didn't entirely dislike, or disagree with, the book, but I also would not recommend it.
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7 of 7 people found the following review helpful
4.0 out of 5 stars A good book that could have been great..., August 11, 2011
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The 13 reviews on this book - through early August 2011 - are generally FAR too positive. This book is definitely in no way the best book out there on the financial crisis. Not even close. It is also not a book about the "suicide" of what was unquestionably a great American company. There is not one shred of reporting of any intention to inflict any damages from within any part of the AIG, let alone the demise of the company (which of course never occurred thanks to US taxpayer bailout money). In general, I also found the book to be too positive and slow to criticize Goldman Sachs or AIG during the Greenberg years. In reality, it is as much a book about Goldman as it is about AIG.

Also on a negative note, this book also reads more like a draft for editorial review than an final document ready to be published. Too many typos and unreadable sentences hamper to readability of the book.

However, on a positive note, this is easily the best account of what went wrong at the AIG. There are new insights here about the AIG that are not present in any other text. Here are my takeaways, in order of importance.

1. Lack of focus on risk.
Boyd wisely focuses on the basic problem in FP's decision to sell the AAA financial rating of AIG's balance sheet for a small sum (11 basis points) with almost no critical evaluation of the risk of a individual deal exploding and a flawed assumption regarding almost zero risk of a systemic loss to the total FP CDS portfolio, i.e. that the probability of no loss was 99.5% and that it would require a recurrence of the Great Depression and the 1929 Crash to a correlated loss. He also argues that the AIG leadership under Martin Sullivan had no idea that these CDS agreements included a "collateral call" provision (called a CSA) and that no one inside AIG understood the risk these calls presented. According to Boyd, the CDS deals required the AIG to post collateral if there was more than a 4% deviation from par value in the mark-to market valuations of the contracts. If there is one fatal error that AIG committed, that would be the failure to understand the CSA risk. Goldman Sachs reportedly viewed these provisions as critical and were the first to demand a call from AIG. beginning with $1.8 billion. Yet another form of collateral call appears to have been required only if AIG lost its AAA credit rating. In one article on this issue several years ago, Joe Nocera reported in his NYT article that these provisions were not needed, that they were the main source of AIG's problems, and that the CDS contracts could have been written without them. He also claimed that FP got only a few extra basis points in fees for what they thought was the impossible scenario of AIG being down-graded. Some clarity on these differing collateral call provisions would be a great idea for further research, with a sample (redacted) contract included so we can better understand what these agreements stated.

2. Not just an FP problem
Boyd notes that the Securities Lending practices of AIG's capital management team in NYC (beginning after MRG's departure) contributed significantly to the financial problems of the company, and were essentially a Ponzi scheme (with an interesting comparison posed to Madoff). So FP does not fully account for all of the empire's woes. This is new. That this happened in 70 Pine Street in the shadow of the CEO and CFO also shows the extent of management change in the years following Hank's departure. Boyd is spot on in saying that this would not have happened with MRG at the helm. No way.

3. NAIC was not oblivious
Boyd also notes that the Texas Insurance Department was quick to recognize the changes in the Securities Lending group and, together with the NYC DOI, was about to seize control of certain AIG insurers immediately prior to the September 2008 meltdown. Generally, there is a perception that the NAIC was asleep at the switch, but this is clearly wrong.

4. PWC deserves a lot of credit not buying smoke and mirrors
In addition, Boys also gives the AIG auditor, PwC credit for getting the Board to oust Sullivan and to pay attention to what the FP operation. A lot of people wonder where the CPA auditors were in exerting their proper role during the crisis, but here is an example of a CPA firm that - at least as much as Spitzer - got AIG to understand that it was in trouble and in need of management changes.

5. FP operations was not entirely in London - regulators in USA had jurisdiction
Boyd also shows that, contrary to popular thinking, the questionable CDS underwriting did not occur entirely in London. In fact the senior fellow at the London shop was quite early to question the risks being assumed. Although the actual CDS contracts may have been in London, the key decision makers were in Wilton, CT. So this debunks the theory that US regulators simply were not able to exert any jurisdiction over what was going on (see Theresa Vaughan of NAIC testimony report to Congress).

6. OTS audits failed to catch CSA risk
Although he does not sink to the ultimate cop-out of claiming the AIG's malaise was a "perfect storm," Boyd does try too hard at times to rationalize the shortcomings that could have stopped the madness. For example, he mentions two audits that were conducted by the OTS of the FP agreements, and gives the OTS some credit in finding some problems in the second audit. However, he explains away the challenge of discovering the cancerous CSA provisions embedded within the CDS contracts as being "prohibitive" in terms of the time and effort required to dig into all of FP's contracts. On this point I strongly disagree: A random sample of just a few files could have exposed the presence of these deadly collateral call provisions, and the fact that FP was assuming that there was almost no change of a widespread need for these calls to exercised. The CDS contract files including details of the collateral call provisions could have been shipped in boxes from London, or scanned for electronic review by anyone, anywhere.

6. Excellent but undeveloped ideas in closing chapters
Although underdeveloped, the narrative argues that the repeal of Glass Steagle by GLB in 1999 was a critical event that fueled the development of CDOs and CDS products as the five investment banks in creased their leverage in an effort to competed with the major bank holding companies. This in turn accelerated the need for these investment bankers to secure their credit risk exposures through the purchase of guarantees from AIG or other insurers (such as AMBAC or MBIA). The final chapter develops this theme, but I would the discussion less than complete. In closing this book, Boyd raised some prescient questions or points that beg further discussion, like why were so many insurers and investment banks given the right to cheap new funding by being allowed to become bank holding companies when this right was not granted to AIG, and also - on a macro level - why it is rational for a country with over 9% unemployment to have a DOW that is around 12,000? Although more could have been said, he leaves the reader with much to consider going beyond the boundaries of the AIG.

To go from good to great, in addition to some editing, this book needs a comprehensive summary chapter tying together all the disparate good ideas and "lessons learned" that are strewn throughout the its 300 plus pages. If it goes to a second edition, Boyd could achieve this goal with a new Introduction or a revised Epilogue.
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6 of 6 people found the following review helpful
2.0 out of 5 stars An alternative view of AIG's downfall in search of an editor, October 28, 2011
Jason W. Solinsky (Cambridge, MA United States) - See all my reviews
In "Fatal Risk", Roddy Boyd's retelling of AIG's financial collapse, the only villain is Elliot Spitzer.

Boyd has spent countless hours interviewing current and former AIG, AIGFP and Goldman executives. In the resultant tale, AIG's failure is laid at the feet of unfortunate circumstances, missed opportunities, and good old fashioned incompetence. No serious attempt is made to rebut alternative explanations for what happened, such as wanton greed, misaligned incentives, and willful ignorance. Facts suggesting the possibility of such conduct are mentioned, but are then left hanging, unaddressed by Boyd's sources (many of whom are still engaged in litigation as a result of the events in this book).

The telling of this tale is badly hampered by an atrocious job of editing and questionable pacing. There are dozens of grammatically broken paragraphs that require extended analysis to determine what the author actually intended to say, and hundreds more which could have been substantially improved by a decent editor. The pacing of this book is uneven. A majority of the book is devoted to events which occurred long before the financial crisis, while short shrift is given to the crisis itself.

"Fatal Risk" is a relatively self serving (and badly edited) explanation of AIG's collapse by the men who blew it up.
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6 of 6 people found the following review helpful
4.0 out of 5 stars Suicide or Murder?, April 21, 2011
Nearly three years on, the "failure" of AIG and its takeover by the government is both one of the most well known episodes of the financial crisis and one of the worse understood.

Into that paradox steps Roddy Boyd with "Fatal Risk."

One of the strengths of the book is the background it provides about some of the personalities involved in AIG, an insurance company that branched out into other financial services. One central character is Maurice "Hank" Greenberg, AIG's longtime chief executive. Mr. Greenberg's father, a cab driver, was killed in an accident when Hank Greenberg was five. Hank went on to land with the Allied army in the invasion of Normandy, fighting his way though Europe and arriving at Dachau within a day of that concentration camp's liberation. Then, in the Korean War, he commanded an infantry platoon.

Another important character is Joseph Cassano, who became head of AIG's financial products division. Mr. Boyd describes him having attended "Brooklyn College on financial aid," the son of a police officer. "In an atmosphere of people who happily worked 12-hour days, Cassano worked 14 to 16 hours, sometimes more." Mr. Cassano had no children, and his wife had breast cancer. "Refusing to use it as an excuse, he would spend time with her and then stay up and work the night around," Mr. Boyd writes.

Mr. Boyd is also acute at describing how the AIG board of directors was stocked with former U.S. government officials, including President Ford's secretary of housing and urban development, Carla Hills, who was George H.W. Bush's U.S. trade representative; President Clinton's ambassador to the United Nations, Richard Holbrooke, and Mr. Clinton's defense secretary, William Cohen.

Another strength is the book is the portrayal of the aggressive tactics used by regulators against AIG. We're reminded that the then-attorney general of New York, Eliot Spitzer, forced out Hank Greenberg, who had a better handle on risk than did his successor.

But Mr. Boyd doesn't make the error of blaming the entire thing on Mr. Spitzer. The book recounts how the George W. Bush administration's Securities and Exchange Commission provided leaks to reporters for anti-AIG stories.

At that point, what the regulators were after AIG for wasn't excessive risk-taking but rather deals it made providing what were referred to in at least one internal document as "income statement smoothing" services to corporations.

Another good thing about the book is its coverage of AIG's compensation practices. The compensation scheme at AIG Financial Products was designed to make employees "think longer term about risk and liquidity." Writes Mr. Boyd, "There may have been no other workplace in finance where employees were more incentivized to avoid short-term risk and to stay at the firm building long-term equity."

The book is less satisfying in its detailing of what role, if any, short-sellers played in AIG's crisis.

On the big questions of what happened to AIG and why, Mr. Boyd sheds some useful light: "No one at the Fed seems to have a reason for why Goldman Sachs and Morgan Stanley were allowed to become bank holding companies but AIG was not. Shareholders were wiped out and then had the cornerstones of their remaining franchise -- the foreign insurance operations -- sold without a matter getting put to vote, a clear violation of Delaware corporate law statutes."

Other times, Mr. Boyd comes tantalizingly close. Mr. Cassano's "crucial mistake," Mr. Boyd writes, was not dwelling on the distinction between economic losses and mark-to-market losses. "No one," Mr. Boyd writes, "was wondering in December 2007" what percentages of the loan pools underlying the CDOs would be irrevocably defaulted.

But what does it say about the context that looking at assets as a long-term investment amounts to a "crucial mistake"? "No one" may have been taking a less-panicked approach in December 2007. But those who eventually bet on a recovery of distressed mortgage-backed assets bought them up cheaply from firms that were being forced to unload them, and made a lot of money.

This book's subtitle is "A Cautionary Tale of AIG's Corporate Suicide." There were some elements of suicide in the AIG story, but there were also some elements of murder. And in some sense it was neither a suicide nor a murder, because AIG is not dead, but still in business, as are its parts that have been sold off. Mr. Boyd doesn't totally solve the case, but he turns up a lot of helpful clues.

Disclosures: I was sent a review copy. Mr. Boyd was a colleague of mine at the New York Sun.
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13 of 16 people found the following review helpful
3.0 out of 5 stars Cautionary tale of what?, September 26, 2011
Hard to know what to make of this book, which presents Goldman Sachs as a hero telling truth to the market and Eliot Spitzer as a villain, with Hank Greenberg as his victim. Dowd doesn't explain much about Gen Re, the transaction that led to Greenberg's ouster from control of the incredibly successful insurance company he'd built, but even Dowd has to admit that it was an out-and-out fraud designed to fool investors and regulators about the profitability of AIG's trading partner, and that anyone apprised of its details would have known that. Dowd presents evidence both ways, but clearly thinks that Greenberg didn't really know the facts of the transaction, despite the fact that the reason to laud Greenberg is that the man obsessively monitored risk and insisted on knowing every aspect of AIG's business. The problem, and the real cautionary tale, is that Hank Greenberg's presence was used as a substitute for actual accounting risk control. Can you call a man a success when he builds a company whose assets and liabilities are greater than those of many countries and that, with him gone, cannot accurately tell you what's on its balance sheet? I think that question answers itself.

Dowd's condemnation of Spitzer suggests that outright fraud revealing, at the absolute minimum, an absence of a corporate structure that could detect and prevent such frauds, should have been written off as inconsequential because AIG was too big to punish. He also argues that Spitzer became megalomaniacal in treating big banks like criminal enterprises, except that they were criminal enterprises that succeeded in looting the economy and are still going. There's plenty of blame to go around, and Dowd gestures at that in the end, though he still maintains that Goldman was just exercising good business sense when it demanded to be paid par (face value) for its now-nearly-worthless holdings. He suggests that the government had few choices but to pay that rate (even as he points out that it would have been possible for AIG to refuse Goldman's collateral calls and litigate it out--there's an adage, which he repeats, that there's a courtroom on every corner in New York), but I'm not nearly as sure and I just don't trust his judgment by that point. However, Dowd's more general conclusion is easy to agree with: that repealing Glass-Steagall, which separated commercial and investment banks and thus prevented the kind of disastrous overleveraging we saw in the runup to the crisis, was an enormous and foundational mistake.

Also, and this is just a pet peeve, where was the editor? There were three misused homonyms, each of which is plausible but wrong (took the reigns, said his peace, and into the breech).
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7 of 8 people found the following review helpful
5.0 out of 5 stars The account of the AIG disaster - and real lessons in how large financial companies fail, April 17, 2011
John Hempton (Bronte, NSW, AU) - See all my reviews
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There are dozens of books on the financial crisis: I have read many of them and the Kindle samples for just about all of them. There are only two I would recommend: those are Bethany McLean and Joe Nocera's excellent All the Devils are Here and the much more specifically detailed Fatal Risk from Roddy Boyd. Roddy's book is solely concerned with the failure of AIG.

Both books start without any strong ideological preconceptions and let the facts woven into a good story do the talking - and both wind up ambivalent about many of the major players - with many players having human weaknesses (gullibility, delusion, arrogance etc) but committing nothing that looks like a strong case for criminal prosecution. Reading these you can see why there are so few criminal prosecutions from the crisis. And you will also see just how extreme the human failings that caused the crisis are.

If you are not familiar with the saga that led up to the mortgage collapse, the rise of securitisation, the depth of the repo market, the lowering of credit standards start with the McLean/Nocera book. If you have to give a book as a gift to someone who is not a financial professional you could do little better. That is the best general book yet written on the crisis.

But for me (and because I was familiar with the broad details of the crisis anyway) the best book of the crisis is Roddy Boyd's Fatal Risk. It is not a good first financial book to read and I had to think quite hard as to the details that Roddy glossed over - but that was because Roddy had to make a choice - was he writing for someone who vaguely knew what a credit default swap was or was he writing for someone who had actually read a "credit support annexe (a CSA)".

Fortunately for most people he does not want to assume you have actually read a CSA (although I have). But less forgivingly Roddy does not feel the need to define an Alt-A mortgage or a repo line. This is a fabulous book - but it deals with complex subjects without shying away from their complexity and it assumes you have enough knowledge and intelligence to cope.

Truths, generalities and people

Underlying Roddy's books are a few financial truths that bear repeating. Firstly anything that has any chance of going wrong if done for long enough will go wrong. It doesn't matter if your model tells you that you will be fine in any mortgage default environment short of the great depression: if you continue to bet on that model you will lose. Maybe not next year. Maybe not in ten years but you will eventually lose.

Likewise if you write large quantities of out-of-the-money puts you will eventually lose a lot of money.

Likewise if your model assumes that there is always going to be a deep liquid market in any security (with the possible exception of a Treasury bond) then one day you will wake up and the buyers will have scampered like antelopes from a waterhole at first sight of a lion. Any business that has to roll a large amount of debt at regular intervals is dangerous.

Ignore these truths and you take a risk. Ignore them on a grand enough scale and the risk will be fatal.

Whatever: if you ignore these truths you might become rich in the interim. Earnings and growth might be fine. You might even look like a genius. Maybe a "legendary CEO".

So Roddy's book starts a long time ago - the 1970s and 1980s when AIG did not forget those truths - and it talks about AIG as a superlative risk management machine. The first section of the book is a repeat of the AIG legend - a legend of superlative risk management mostly in the head of one man: Hank Greenberg. It is a legend that might be overstated but that doesn't mean that it is not mostly true. Hank really did work absurd hours, pick at steamed fish and vegetables and ask sophisticated questions to six people at once. Hank knew to really understand what was going on you had to go three to four levels deep in an organisation and ask the right questions of assorted lower/mid ranked officers. They would answer truthfully because of a desire to impress or fear or even that (unlike many senior managers) they were not accustomed to spinning. He would get the raw data. He would make the assessment.

There were two things however that Hank did not assess properly: his own mortality and his declining skill in old age. There is no question of declining skill. It is very hard to imagine the Hank Greenberg of 1975 falling for China Media Express - but the Hank Greenberg of 2010 was suckered. As for mortality he had no plans.

He also did not plan for Eliot Spitzer.

By 2000 Hank was extremely concerned about what Wall Street thought of his stock. That is no surprise - AIG was the most highly valued large financial firm in the world (I remember being startled that its PE was three times Wells Fargo). And - unstated by Boyd - Hank liked that a lot because he used AIGs stock as currency to do acquisitions. He was - much to the chagrin of many investment bankers - very selective as to the acquisitions he would do (he knew acquisitions were fraught with risk) but he did some mighty big ones including the purchase of Sun America. I remember that one - and thought (correctly in hindsight) that it probably made sense primarily because AIG was paying with inflated stock.

So by the year 2000 Hank was - apart from running the business - actively manipulating the earnings of the business. As far as I can tell he ran the business particularly well (the legend of AIG was not false) but he also played Wall Street like a fiddle and gave them the numbers they wanted even if they were massaged a little (or maybe a lot).

Moreover - and this is critical for the story - AIG had no overarching operating system. It was a bunch of fiefdoms all reporting to Hank. This meant that AIG could not produce earnings results until the very last day they were legally allowed to file them. It meant Hank could personally massage earnings. At many financial institutions some approximation of earnings are known every month. At AIG there was no system they could query and ask for their aggregate Alt-A mortgage exposure. Hank might have known - indeed almost certainly would have known - but the system is Hank and Hank being removed or dying would be disastrous for AIG.

And then along comes Spitzer. Spitzer discovers a relatively minor finite insurance transaction between AIG and General Re. (Believe me it was minor - I know of plenty of nastier transactions than that... many of which were never prosecuted.*) However it is a clear attempt to fudge the numbers - Spitzer really is onto something. And with bombast and the power of the Attorney General he makes Hank Greenberg's world fall apart. Spitzer fights dirty (and it is no surprise that several Spitzer prosecutions later failed because of prosecutorial misconduct) but Spitzer has his clear piece of fakery and he wants and gets his pound of flesh.

Hank is forced out - which is the equivalent to AIG of his sudden death. Worse because AIG went on to repudiate many things Hank stood for including many of his risk-control edicts. If he had died the hero CEO it might have been marginally better for AIG.

The minor nature of the AIG-Gen Re transaction is laid clear when Roddy suggests that there is an "excellent chance that Greenberg gave the Gen Re issues - which cost him his job, his honor, his status and perhaps over a billion dollars in personal wealth - all of five minutes of consideration."

Still AIG-Gen Re was a transaction designed to massage (ie fake) the numbers - and thus speaks to a relationship with Wall Street and a concern to stock price that is unhealthy.

Unstated by Roddy: Hank had forgotten a cardinal rule of risk management: you do that sort of thing for long enough then one day you will find your Eliot Spitzer. This is just as sure as the statement that if you write put options long enough you will one day get your comeuppance.

The new CEO

The new CEO - Martin Sullivan - was the best salesman AIG had. Joe Cassano (who ran the disastrous AIG Financial Products) observed that he never saw Sullivan ask a single penetrating financial question. It's a telling observation.

The place I used to work had a boss who was very suspicious of financial product salesmen because inevitably they wanted to produce what the market (ie the crowd) wanted. And in financial services if you run with the crowd you can get your comeuppance delivered abnormally sharply.

To be fair, there are financial service companies that require salesmen even as leaders. Insurance brokers spring to mind.

AIG however was not one of those companies. It was global, complicated and pervasive and it had no overarching risk management system now that Hank was gone. To replace a control freak they needed another control freak at least until they built control systems. They never got that - and only at the very end (in Willumstead) did they get a CEO that even understood there was a problem.

There is a truism about financial product salespeople: if you put a salesman in charge of a financial institution with large reach and allow him to operate with thin risk control then your earnings will go up. And up. And up. At least until they don't. Martin Sullivan proves that truism.

Under Sullivan some small businesses were allowed to expand in new ways until they became big businesses - ones big enough to threaten AIG and indeed the world. A decent example of the Martin management style comes from a small part of AIG - United Guaranty. United Guaranty was a mortgage insurer - at least for a while the best mortgage insurer on the Street. (I remember thinking that a couple of other players, notably PMI and MGIC were much riskier.)

The right thing to do with a mortgage insurer was stop writing business about 2005 - and certainly by 2006. [Or you could sell it as GE did.] Margins were collapsing and the risk of the loans was rising fast. The independent companies couldn't really stop because that was their only business. AIG was under no such constraint - United Guaranty was a tiny part of AIG and stopping would not have affected the stock price. It might have even been seen by some (myself included) as a sign of discipline. Here is the quote from an AIG unit chiefs meeting in mid-2007.

start quote

As UGC posted its first losses, about $100 million, Nutt was explaining to Martin Sullivan and other senior management that while they hit a rough patch, they were writing excellent new business, and, at any rate, the competition was getting killed. Sullivan smilingly told Nutt that even if he didn't write another dollar in business for a few months, "We would still love him". AIG staffers had a phrase for this sort of response: "classic Martin". It was a decent word or gesture, directed at a manager who was clearly fumbling, both publicly and on the job. But it also carried a serious message: better to be safe than sorry. The trouble is that the time for this was two to three years earlier.

End quote

To not realize that a mortgage insurance business in mid 2007 was problematic was seriously inept. UCG has now booked $3.9 billion in losses. Hank would have been on top of this at least a year earlier. Whether he would have been on top of it two years earlier is more dubious. One year earlier and UCG would still have had substantial losses. But they might have been absorbed by profits in an otherwise functioning AIG.

The two businesses that blew up AIG

There were problems all over AIG (and there were good bits too where individual managers saw the mess coming and ducked for cover). But two businesses stand out for the sheer destruction that they wrought. The better known was AIG Financial Products (FP) credit guarantee business. The less well known was Win Neuger's securities lending business.

The credit guarantee business for thin fees guaranteed securitisation deals - usually very high grade paper or just as often resecuritisations of high grade paper. These were deals that would be fine in any credit event less bad than the great depression. In other words they were "great depression puts" and FP was writing puts. You should know the truism by now.

But worse the credit default swaps had a credit support annexe (CSA) attached. This made it mandatory for the parent company of AIG to collateralize the deals (ie put up hard cash to guarantee payment) under certain events. Senior management of AIG did not even know of the existence of the CSA until the company was at death's door. They believed until very nearly the end that mark-to-market did not threaten liquidity.

I understand how a salesman (Sullivan) missed the CSA. If you followed the credit enhancement business you would know - by law - that the monoline insurers were not allowed to collateralize their obligations. Why of course should AIG be any different? But even that cursory "knowledge" could be dangerous. Both AIG and Ambac had CSAs attached to their guaranteed investment contract business (a business that was run by parent companies). I did not know of these until a well known hedge fund manager sent me a copy and even read it over the phone to me.

But that is a thin defence of AIG. The above mentioned hedge fund manager knew of the CSAs at Ambac and MBIA a couple of years before the disaster - and he had to look and find it. AIGs senior management should have just asked. Their risk management department should have been over every material contract - and believe me these were material contracts. This was an epic failure.

Win Neuger's business was similarly destructive. What he did was [get the parent company to] borrow high grade securities from the life insurance companies, repo them, buy lower grade securities and pledge those back to the life companies to secure parent company obligations to the life companies.

Two things went wrong. The life company management (and later regulators) got mighty jacked when the life companies had lent their good securities and were holding trash security. They required hard capital injections from the parent company to solve this - and along the way AIG kicked in $5 billion. At the end the Texas Insurance Commissioner was going to confiscate four insurance companies (which would have collapsed AIG).

The second thing that went wrong is the counter-parties to the repo loans just wanted cash their back. They wanted it now. To get it though the parent company would need to get back the trashy (and hence heavily discounted) security from the life company, sell them, top up the (now large) shortfall and pay the investment bank on the repo line. This turned marks on the low-grade securities into an immediate liquidity drain on the parent. That is truly ugly.

How they got there too was a story of failure to consider fat tail risks. It is the main story of the book.

Liquidity versus solvency

At the height of the crisis it was very difficult to see whether AIG was a liquidity problem or a solvency problem. If it is a liquidity problem then bailouts don't cost much -indeed structured right they are profitable. If it was solvency then a bailout will be very costly and in extrema (such as Ireland) can bankrupt the nation.

I originally thought AIG was liquidity. I later thought it was solvency. But now the Government looks like it is making heroic profits on the AIG bailout - and it was surely enough a liquidity problem.

There are a couple of lessons here: sophisticated observers (if I am a sophisticated observer) can't tell the difference between liquidity and solvency in a crisis. The second lesson is that any contract that can cause a liquidity problem will - if repeated long enough - actually cause a liquidity problem. Modelling solvency does not cut it... if you run a financial institution you better model liquidity as well - and better be ready for the closure of debt markets.

The AIG people after the failure

There is a lot of anger in the broad community about the people at AIG especially as none of them - those that caused the largest bailout of the crisis - were ever charged criminally. Roddy does not share the anger about the lack of criminal charges but he is angry about the sheer recklessness of some AIG people. This quote was revealing:

Al Frost's [a key salesperson for AIG FP] job was to drum up deals and revenue from the major investment banks and he did. Cassano's job was to ensure that decisions made at FP were logical and made with all available information. He failed...

But Cassano did not fail in a vacuum....

That Martin Sullivan and Steve Bessinger did nothing is now well established. But neither did Financial Services chief Bill Dooley, his CFO Elias Habayeb, Risk Management Chief Bob Lewis and his head of credit-risk Kevin McGinn. Anastasia Kelly's legal department was similarly silent. These people saw everything AIG FP did in real time and had plenty of authority to force at least a reevaluation. It was, in fact, their job to do this...

Save for Anastasia Kelly (who retired) every other person in the line of oversight of the FP swaps book is now gainfully employed as an officer at a publicly traded company with as much or more responsibility than they had previously.

End quote

Roddy is right. 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.

Along this line special scorn needs to be reserved for Win Neuger. He ran AIGs internal asset management business - especially the securities lending business which in itself was big enough to destroy AIG.

He now runs an asset management company with over $80 billion under management.

Where else - except Wall Street - can you be that well rewarded for failure?


I don't want to give too much away. This is the best book yet written about any specific episode of the crisis. I just think you should buy it. Buy multiple copies. Give them to your friends. They will be grateful too.


*Hint to the regulators: try and work out the large finite transaction between Unum Provident and Berkshire Hathaway. There lies a can of worms...
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3 of 3 people found the following review helpful
4.0 out of 5 stars Mostly Interesting, but Sometimes Hard Reading, April 19, 2011
Roddy Boyd makes the case that AIG's collapse was an inside job led by previously unknown executives chasing profits and bonuses. The easy path to insurance company growth had been under-reserving, and writing insurance on anything. AIG, however, was had already done that and was too big in the late 1990s and in so many areas that no 'natural' targets were apropos. Instead, Greenberg bought other companies - his P/E was about 36, buying lower P/E's was an easy path to building AIG's capitalization, for awhile. Meanwhile, liabilities grew from $140 billion in 1997 to $438 billion in 2002. The stock then slid from $80 to the low $50s in 2002, then $44.5 1st-quarter of 2003. Next came a $10 million SEC penalty for helping Brightpoint falsify financial statements, netting a mere $3.1 million in 'premiums.' Another regulatory run-in involved PNC Bank, with AIG using off-balance-sheet (post-Enron) financing to mask the bank's losses. This time it cost AIG $126 million in penalties and restitution, plus the threat of possible future prosecution. Between these two 'encounters,' the worry over what else lay out there, an S&P downgrade from AAA to AA+ over a 2000 AIG deal with InRe to cover up AIG's then shortage of reserves, and pressure from Spitzer, Greenberg was forced out. Greenberg defenders point out that Spitzer's pursuit of Greenberg lacked poof of Greenberg's awareness of those transactions.)

Greenberg was replaced by an incompetent, Martin Sullivan, a salesman who never asked a penetrating financial question. AIG eventually ended up with a bailout beginning in September, 2008 that totaled $182 billion; Boyd, however, believes that Spitzer was the main cause because the eventual result of his forcing founder Hank Greenberg out after four decades was the end of AIG's highlighting risk as a major concern and the firm's financial-products division going on a subprime mortgage security insurance spree. Not only did AIG have to pay full value in the event of default, they would also have to provide billions in collateral if the bond prices declined or its credit rating fell.

The Treasury now owns 92% of AIG; its January 2011 stock price was 95% below the September 2002 level (taking into account a 1-for-20 reverse stock split in 2009).
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2 of 2 people found the following review helpful
5.0 out of 5 stars Very important book, somewhat marred by sloppy haste, July 7, 2011
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This review is from: Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide (Kindle Edition)
This book is certainly about fatal risk, but the subtitle is misleading. Not that author Roddy Boyd fails to tell us the story of how misunderstanding and mismanagement of risk brought down a huge and vital (in both senses) insurance empire, but that he tells us why this was extremely important to all of us. He explains why and how, without planning to or understanding the implications, AIG had become central to the world financial system and why Federal Reserve and Treasury Department officials belatedly but probably correctly concluded that it truly was "too big to fail." He also tells a lot about how Goldman Sachs works, how it became so intertwined with AIG, and how and why it came to play so central a role in AIG's fall and the collapse of the financial system.

Boyd spent a good deal of care in researching his book and drew upon what is obviously an impressive background of knowledge. But the book was written and produced in haste, and it shows. A lot of the writing is pretty leaden, with mixed metaphors and clichéd descriptions, and there are a remarkable number of annoying lapses of grammar and even spelling. More importantly, there are places where the wording is ambiguous and can easily mislead or confuse the reader. A number of points are not explained as clearly as they could and should have been.

The author's strengths as a reporter and understanding of the subject are shown clearly in his portraits of the many individuals who played important roles. Even those who would not talk to him (as a number would not for legal reasons) are described believably as understandable individuals. Some are a lot less heroic than others but there are no demigods or demons here. All are shown as pursuing their goals in ways that were successful in varying degrees and which also had many effects they did not intend or understand.

General readers without any background may find this book somewhat difficult going, at least in some respects. A basic understanding of modern finance really is needed. In particular you need to know more about structured finance than many of the top people at AIG did. There have been some pretty good, succinct explanations in the press that could have been adapted. I suspect that this again is mostly a mark of haste. It also is useful, but less essential, to have some knowledge of insurance.

The book works well in Kindle form.

Five stars. Not because it is flawless, but because its virtues and above all its importance outweigh the defects.
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