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So the economists weren’t to blame for the financial crisis

- May 18, 2009

Instead, “Dani Rodrik informs us gleefully”:http://rodrik.typepad.com/dani_rodriks_weblog/2009/05/phew.html, it was a “guy with a degree from another department altogether”:http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6281953.ece?token=null&print=yes&randnum=1242660877121.

bq. To start with, AIG trod carefully in the new, scientific universe. Sosin’s idea was to buy financial risk from people who did not want it, then sell the risk to others in a series of “hedges” so that AIG kept the fees but not the risk. If a big organisation wanted to lock in an interest rate, for example, AIG would promise to pay the difference in costs if rates rose, then pass the risk to other parties in separate contracts. Sosin supplied the nerds and the models, AIG supplied the reassurance of its AAA rating, and for a long time the alchemy worked. AIG Financial Products (AIGFP), a unit with 0.3% of AIG’s 116,000 employees, made over $1 billion in profits between 1987 and 1992, a vast sum at the time. But Sosin left. And so did his successor, a mathematician named Tom Savage. When Savage departed in 2001, Greenberg put in charge a man he saw as “smart, tough and aggressive”: the unit’s chief operating officer, Joseph Cassano. The new leader had no background in Frankenfinance; his degree, from Brooklyn College, was in political science.

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