The answer is that buyers did not bother to read the fine print carried on most securities. There is no guarantee that the instruments will perform as marketed. The value of all financial products fluctuates, sometimes rapidly and with great effect.
AIG was the largest insurance company in the world when it bought mortgage-backed securities from Bank of American and other firms. AIG’s business was, above all, to access risk. That, more than any other single factor, is at the core of the insurance industry. AIG had an army of analysts. Any multibillion investment made by the firm could have and should have been vetted, if AIG cared enough to calculate its risk.
Bank of America may have made claims about its mortgage products that did not include a highlighting of the worst case result. The bank may have done little to explore those possibilities itself. But, AIG knew better than to purchase novel securities without a background check of its own.
Douglas A. McIntyre
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