Originally Posted by The_Jazz

First and foremost, AIGFP was a tiny division of one of a huge multinational company, both in terms of number of people and in revenue. It's not like this was National Union or American Home (two of the big insurance divisions).

I don't think that there are many people, with the benefit of hindsight, that would call the swaps anything but a bad idea. However, at the time, that wasn't quite so obvious. You need to realize that the AIG mindset played a big role here. Think of the nastiest, dirtiest thing to insure that you can, and AIG probably writes it. Gun manufacturers. Hotels on the beach in Key West. California condominium builders. They have written new coverage for buildings that are actually on fire at the time knowing that they will have to pay a loss. Basically, they'll do anything for a price.

AIGFP had most of their employees in London for a reason. London insurance, while not really unregulated, operates as the ultimate insurance market, where anything can be bought, which is why you see people insure their legs or hair or whatever there. In London, it is not unknown (though it is a little unusual) for someone to bet against something.

If you think that the AIGFP folks were gambling addicts, I think that you need to examine the very nature of the business. The entire thing is a gigantic gamble, especially when you're dealing with something that doesn't have a proven track record.

If you want to examine mistakes that were solely AIG's (i.e. no one conned them), then basically it was that they moved away from their core business model on these deals and didn't do the underwriting necessary to understand exactly what was going on with the mortgages. That said, there hadn't been a negative housing market since the 1930's, and there was no reason to think that one was even possible until mid-2007.