Monday, September 29, 2008

Just who is the expert?

In reading a Time business on line article (I'd include the link, but Time already took the article off their site) about the AIG bailout, the author noted that one reason the government decided to jump in was the size and global reach of AIG.

On thing worth noting is that is that AIG got in trouble not because of it’s core insurance business, but because of it’s investments. Investments, what is an insurance company doing in the investment business?

Simple, investments are a place to park the huge profits from insurance premiums. All that money they collect from the people buying insurance is invested at the highest rates they can find. What did you think, they put it in a vault somewhere and let it sit?

Insurance companies put that money to work, keeping only the cash reserves the regulators tell them they need in case they have to pay you for a loss.

What this tell us is that the people making the investment decisions at AIG, the best and the brightest they could find, really didn’t understand the level of risk involved in their investments.

Now when the decisions made by the best and brightest minds we could find go bad, who do we turn to for advise, the same people who made the decisions and the people who trained them.

When I was still working, if I screwed up this bad, I’d be the last person my boss would ask for advice. After all, if my best thinking got us here, why would he expect my best thinking to fix it?

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