Sharpe's Opinion

The Financial Crisis Which Started In America

While reading this piece from the New York Times last week on ‘protecting A.I.G.‘s house of cards’, a thought occurred to me when I came across the following passage (emphasis mine):

As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.

To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its ‘financial practices’ unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

A.I.G. is an American company and is deep within the heart of the financial crisis. As the article points out, the American Government is pumping billions into saving it because if A.I.G. fell, it would probably take most of the financial system of the Western world with it. And yet, the division of the company which has put it at risk was operating from London. A.I.G.‘s financial crisis started in Britain, but America is bailing it out.

I wonder, are there other examples of bad British financial practices taking out American companies? Would it be reasonable to suggest that this crisis began in Britain after all, it just began with American money?